Public Bill Committee

[David Taylor in the Chair]

New Clause 2

Review of pension credit entitlement
‘(1) The Secretary of State may from time to time, and shall when required by subsection (2), lay before each House of Parliament a report by the Government Actuary or the Deputy Government Actuary on—
(a) current rates and coverage of pension credit entitlement;
(b) likely future rates of pension credit entitlement; and
(c) such other matters as he considers to be relevant as affecting the present and future take-up of and eligibility for pension credit.
(2) The Secretary of State shall lay such reports—
(a) five years after the coming into force of Part I of this Act, and
(b) thereafter at intervals of not more than five years.’.—[Mr. Waterson.]

Brought up, and read the First time.

Nigel Waterson: I beg to move, That the clause be read a Second time.
 Welcome back to the Chair, Mr. Taylor. We come to one of the big issues in our deliberations. I make no apology for going through the new clause in some detail, because it deals with a crucial issue for the Committee and for the legislation before us. It replaces the possibility of oral evidence, so I am going to be the Punch and Judy man, giving the Pensions Policy Institute’s views on means testing and the Government’s views on means testing, in a kind of seaside show. We could have had the real thing had the Government taken a different view. However, we have the promise of another seminar, on 20 February, and Members will be keen to put that date in their diary—while tickets last. I, personally, am really looking forward to it.
 Means-testing matters because it is on the increase. We are discussing a system under which we have large-scale means-testing, despite the fact that the current Chancellor said when Labour was in opposition that it was his party’s aim to reduce means-testing. Almost 50 per cent. of people now retiring are means-tested. I am on common ground when I say that if we carry on as we are, the figure will rise to 70 or 75 per cent. by the middle of this century. There is a sort of consensus that that cannot be allowed to continue; it was very much a theme of the Turner report.
The Minister extolled the virtues of means-testing in a previous sitting, saying that it put money into people’s pockets and that it was therefore a good thing. However, it is a bad thing for all sorts of reasons. It does not necessarily provide help to those who need it most. For example, about 1.5 million people who are entitled to pension credit do not claim it, despite large expenditure on advertising campaigns, and indeed, the sterling efforts of the Pension Service. I have visited my local service, and it has pushed the boat out on home visits and so on. I am sure that that has happened throughout the country.
People do not claim pension credit for a number of reasons. They may think that it is all too complicated or intrusive, or that they could not possibly qualify. If one reads across to the means-tested benefit with the worst claim record, council tax benefit, elderly constituents of mine who own their own homes, so they are capital rich but cash poor, do not imagine for a moment that they could claim council tax benefit.
There is a problem because a large proportion of people who are entitled to means-tested benefits will never claim them. When pension credit was introduced, in a massive act of cynicism, the Treasury itself calculated that 1.4 million people would never claim it. The Treasury has a shrewd idea about the limits of means-tested benefits.
Means-testing also makes it difficult, if not impossible, for people and their financial advisers to predict whether it is worth their while saving for retirement. That is a key issue. There is much discussion, quite rightly, within and outside Government about the buzz phrase “financial accountability”. Everything is relative, I suppose, but one of the gloomier aspects of those seminars that seemed to stretch over last summer was the average person’s dismally low ability to think through their financial options, particularly on pensions. I do not have the survey with me, but a recent study showed that if anything, the problem is becoming worse among younger people. The new generation that is coming up ought to be worried because they will live longer and save less, but they have even less understanding of the system. Means-testing makes it difficult, because it is a disincentive to save. That is why we support measures that are part of a package to boost the basic state pension. We concluded before the last election—I do not want to get into this debate again—that the only reliable way to get help to the poorest pensioners was to do just that.

Mark Pritchard: On that important point, my hon. Friend is right. Apart from means-testing being a disincentive for saving, does he agree with Help the Aged, which suggested that it was, in fact, pernicious?

Nigel Waterson: The Americans would say that “pernicious” is a ten-dollar word, but I suppose that it covers the point. The word that I often use is “cancerous”, because means-testing eats away at private savings. Although other factors may be at work as well, much of the collapse in savings generally since 1997 is attributable to the surge in means-tested benefits. I cast no aspersions on those who are involved at the end of a phone or on home visits in trying to deliver means-tested benefits, but, with the best will in the world, there are natural limits to how far they can be pressed on those who need or deserve them.

Mark Pritchard: Does my hon. Friend agree that, while we can be technocratic about the details and discuss the minutiae of a Bill, means-testing helpfully draws us out from the details and reveals a fundamental philosophical difference between the positions of the Opposition and the Government?

Nigel Waterson: There is a philosophical difference. As my hon. Friend invites me on to that territory, let me deal with it. I believe that the Chancellor, who is about to be Prime Minister, actually likes people being dependent on the state in all sorts of ways, whether employed directly by it or dependent on it to earn a decent living through means-tested benefits and so on. As Conservatives, we take a different view. We believe that the more people are dependent on handouts from the state, the less likely some of them are even to claim them in the first place, and the more demoralising it is for people who do claim them. That is another extremely good reason for wanting not just to stop the increase in means-testing but to reverse it.
One of the issues that my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) raised on Second Reading was how we start rolling back means-testing in a clear-cut manner. One way was to gain consensus on an aspiration to do so, which means that, as and when funding is available, whoever is in Government will boost the state pension above and beyond what is in the current package.

James Purnell: Since we are on the topic, does the hon. Gentleman agree that another way to put the philosophical difference is that pension credit has managed to lift 2 million people out of absolute poverty, and 1 million out of relative poverty? It has in large part corrected the disgraceful situation that we inherited from the Conservatives. He said in response to my hon. Friend the Member for Northampton, North (Ms Keeble) earlier in this Committee’s proceedings that his party would not have introduced the pension credit. Does that not show clearly the philosophical difference between the two parties?

Nigel Waterson: The Minister is being a little selective. When I said that we would not have introduced the pension credit, I was responding to the allegation that we would scrap it. That is not our policy. The last thing that the pensions system needs is another period of turmoil and change. The key issue is reducing the amount of means-testing, and people’s dependence on it.
We can bandy figures around. The Minister is aware that there are still 2 million pensioners living in poverty, 1 million of whom live in deep, persistent poverty. On any view, he is not reaching the 1.5 million or 1.6 million who are not claiming the pension credit to which they are entitled. My basic point is that there are limits to means-testing.
I notice that the Minister did not respond to my point about a consensus on the aspiration to boost the state pension even further when fiscal circumstances allow. That, in the long run, must be the way to make a real difference to the amount of means-testing. Within the limits of this Bill, the issue is whether a particular level of means-testing will still prevail after the reforms and, if so, what it will be—I will come to that in a moment—and what effect it will have on the success or failure of the system of personal accounts.
As the Association of British Insurers points out in one of its briefings, the Government project that the figure for means-testing will fall from about 45 per cent to around 29 per cent by 2050 post the reforms. It says that this will be a
“welcome shift that would return means-testing entitlement to its previous levels.”
It is important, in parenthesis, to make the point, and I think someone made the point this morning, that there will always be some means-testing in the system. There will always be an irreducible minimum of people who need means-testing to deliver to them the top-up benefits of whatever sort that they actually need.

Mark Pritchard: It is very relevant that on Second Reading this issue was covered in great detail. The possible reduction in the number of people claiming means-tested benefits was mentioned. The googly in that is the fact that we are likely to see an increase in the number of economic migrants coming from the new European Union countries, which will completely throw out all the figures that the Government have suggested. We have had 2 million new economic migrants since 1997 and 0.5 million are expected in the next year. During questions on the Floor of the House the Secretary of State admitted that people coming from European Union countries would have their pensions topped up by pension credit.

David Taylor: Order. Interventions should be short. There will be an opportunity for speeches later on.

Nigel Waterson: My hon. Friend makes a perfectly legitimate point and we had a lengthy debate earlier on in the Committee about so-called frozen pensions. One thing is clear, whether people are coming from eastern Europe or going from here to other countries, there are enormous movements of people—both young people who want decent jobs with reasonable pay and older people who are looking to retire in other countries or over here. One of the issues that has to be addressed is to what extent they are likely to be in receipt of top-up benefits. That could be pension credit here. If my hon. Friend remembers, there was a discussion about whatever the equivalent is to top up the incomes of pensioners in Canada, Australia or wherever. That is an issue that we shall have to come back to.
And in Bosnia and Herzegovina, or whatever it is called—

Mark Pritchard: Serbia.

Nigel Waterson: Indeed. I was saying that the ABI was concerned because, as it says, alternative modelling suggests that means-testing will not fall by as much as the Government have predicted. It also says:
“Any long-term forecast of this nature includes a large number of assumptions and so can never be certain.”
On that issue, I want to deal in a bit of detail with the assumptions made by the different warring factions on the levels of means-testing. Those assumptions are very important. The ABI says:
“The ABI believes that much greater clarity is needed on the impact of the Bill on future levels of means testing”.
We agree with that, hence new clause 2.
All that the new clause says—it seems perfectly modest to me—is that the Secretary of State should from time to time lay reports from the Government Actuary on rates and coverage of pension credit entitlement, likely future rates—projections into the future—and anything else relevant to the eligibility for and take-up of pension credit. The reports should be published every five years. Whichever party is in government, it is important that the Government focus, whether they like it or not, on the penetration of means-tested benefits following these reforms.
The first view on all this is, of course, that of the Pensions Policy Institute, which disagrees quite significantly in its projections as to the range of pension credit eligibility under the Government’s proposals. The PPI’s document on pension credit, produced some months ago, states that
“future eligibility for Pension Credit is very uncertain.”
It therefore presents its estimates as a range and sets out how it has arrived at that range.
Just to be clear, it is not that I think that the Department is wrong and the PPI is right, or vice versa; it is simply that the PPI is working on a different set of assumptions. It is our job, in the absence of any oral evidence session, to try to work out which set of assumptions is more likely to be the case. I think that the PPI’s argument is that the Government’s assumptions are on the conservative side.
Let us consider the PPI’s assumptions, particularly in the modelling paper that it published alongside its report. First, income from the basic state pension is projected to grow in line with average earnings growth, reflecting the new policy. That seems perfectly reasonable. Secondly, income from the state earnings-related pension scheme/the state second pension grows considerably faster than earnings, as people receive more SERPS and S2P as the system matures, especially at the lower end of the pensioner income distribution.
Thirdly, private pension income grows by less than earnings, reflecting current experience of pension contributions not keeping pace with the increasing costs of private pension provision. That seems to me an important issue and one on which there is a legitimate ground for dispute between the PPI and the Government. How does one project the growth in private pension income into the future? I guess that, if personal accounts are a roaring success, those figures will have to be adjusted. We shall return in a moment to how the Government approach any assumptions to do with private pension income.
Fourthly, income from other sources—including non-pension saving, other state benefits such as disability benefits, and earnings—grows broadly in line with average earnings, reflecting growth in earnings and saving, but a decline relative to earnings in the value of other state benefits. We have heard in debates in Committee that some benefits will still be pegged to prices, rather than earnings.
The PPI says—I suppose that it would say this—that those projections seem reasonable
“compared to what we know about the likely trends in each of these components. They are equivalent to assuming all income grows at 2 per cent. a year, real, between 2005 and 2050”.
The PPI then says—this is the really important bit—:
“In this scenario, Pension Credit eligibility under the White Paper proposals remains roughly at today’s levels of 45 per cent. to 50 per cent”.
It has examined other models, and it concludes that its estimates
“give a range of the possible extent of Pension Credit...of one-third to two-thirds in 2050, with a base case of no change from today’s level of 45 per cent. to 50 per cent...This would mean between 4 million and 6 million households eligible for Pension Credit.”
The PPI’s document is helpful, because it sets out the basis on which it has approached the issue. In fairness, it has been in discussion for some time with Department for Work and Pensions officials, trying to narrow any gap between them. Certainly as recently as last month, when we contacted the PPI, it confirmed that it was
“still in discussion with DWP analysts to understand the differences between our respective projections of Pension Credit.”
It goes on to say that it is working not to “close the gap” between the projections,
“but rather to understand the different assumptions that drive the results and identify scenarios that are consistent with each projection.”
The PPI ends charitably by saying:
“Projections of this nature are inherently uncertain, and there is not a single right answer!”
The institute also tells me in a separate e-mail:
“We are unlikely to change our projections, because they still seem reasonable to us.”
A more recent item may have come under the umbrella of written evidence, but I think that all members of the Committee have had the benefit of the PPI’s latest briefing note, No. 36, which asks:
“Will the Pensions Bill solve the problems of state pensions?”
Answers on a postcard, please to the Minister.
The institute goes on in the briefing note to make certain projections, particularly in chart 4, which is headed:
“Incentives to save in Personal Accounts will depend on individuals’ circumstances.”
It is only fair to summarise the paper in a bit of detail. The institute makes the point that without reform,
“the proportion of households eligible for Pension Credit was expected to grow...to 70-85 per cent. by 2050.”
It states that there will be a reduction in the reformed system,
“although 30 per cent. of households being eligible would be historically high for Pension Credit and its predecessor benefits”
and that
“Government expectations of private saving were too high.”
 I shall return to the Government’s approach and assumptions shortly, and I hope that the Minister will be even more helpful about that. The institute also comments:
“For other types of individuals—notably people in their forties and fifties in 2012 with no prior saving, and those who are likely to rent in retirement—incentives to save could be considerably lower”.
The document continues with a reflection, echoing our debate earlier today, about
“the importance of information to help people make the right choice.”
Concerns remain, therefore, and in a press statement only a couple of days ago in Pensions Week, the institute was reported as saying:
“The reforms will leave the state pensions system still too complex.”
The article also reported the institute’s
“concerns about the sustainability and incentives to save, as well as likely returns of the government’s new personal accounts, due to their interaction with means-tested benefits.”

James Purnell: We have already dealt with the issue of whether the self-employed, one of the groups that the hon. Gentleman mentioned, will automatically be involved—which they will not. Does he recognise that we are consulting on whether the other group—people who have reached their 40s or 50s without really having accumulated any saving—should automatically be enrolled? Does he furthermore recognise that people who do not have any saving by the time they are in their 50s are the ones for whom the kind of safety net that he, too, supports are designed? The safety net is to help people in that situation, who would otherwise, in time, be in penury.

Nigel Waterson: People who are getting to the end of their working lives and who have not made any savings may well need help from the state. I do not think that there is any contest about that. I am delighted that the Minister is consulting about that, and I look forward to hearing, when he makes his speech, whether the Government have moved at all in their projections of means-testing levels after the reforms.
I do not want to steal the Minister’s thunder, but I am looking at a summary from the DWP website about projections of pension credit entitlement. It projects that
“around a third of pensioners will be eligible for Pension Credit by 2050 under the reform proposals”.
Interestingly, it states that the estimates do not include the effect of personal accounts. On one level, I can understand that. We are debating personal accounts and we even have the joy of another Bill to look forward to in a little while, which will set out more of the details. However, it is something like “Hamlet” without the prince when we try to estimate the relevant levels without making some assumptions about the effect of personal accounts.
The DWP summary goes on to state:
“Pension Credit eligibility becomes primarily concentrated among single pensioners, mostly women”
and that
“hardly any pensioner couples are likely to be eligible by 2050.”
It would be interesting to know whether all those assertions had been agreed with the PPI as part of the continuing discussions. The document states:
“Eligibility is strongly linked to the higher Pension Credit rates for disability and caring; approaching a half of those eligible for Pension Credit in 2050 get higher rates of Pension Credit because they also receive disability benefits, are carers, or have additional housing costs.”
It also talks about capturing robustly
“changes in the projected distribution of pensioner incomes as well as changes in average incomes.”
The document addresses an issue that is taken up in the regulatory impact assessment about the “modelling approach”. I believe that some of the modelling has changed in recent times. It says that the Government have used the Pensim 2 model because it enables them
“to generate a more plausible future distribution of pensioner incomes than is likely to be possible from a static simulation model, and to assess the effect of varying key assumptions.”
The document goes on to say:
“The reduction in Pension Credit...is driven in part by a projection that incomes in the bottom half of the pensioner income distribution (which is most relevant to Pension Credit entitlement) are likely to grow faster than average. This primarily reflects projected increases in state pension entitlements.”
Again, it would be interesting if the Minister pinpointed where the PPI’s analysis varies on some of those issues.
I move to the regulatory impact assessment. The Conservatives do not have the Pensim 2 model to play with, but I imagine that the Minister whiles away many a tedious evening by feeding some assumptions into it in the DWP basement. The RIA tells us that the Government’s projections of pension credit are
“based on the Pensim2 dynamic micro-simulation model”—
which is presumably different from the original steam model—
“that has been developed in DWP.”
It tells us that the model
“builds up projections of income from a series of equations and assumptions that generate labour market and pension histories for a representative sample of the population. It simulates the accrual of...pensions”
and so on.
The RIA goes on to this key point:
“Projections in the White Paper were based both on Pensim2 and a more traditional ‘static’ microsimulation modelling approach”—
an abacus, presumably. It continues:
“This reflected that Pensim2 was a relatively new model and so it was important to validate its findings against another model. In the light of further analysis...analysts now consider that Pensim2 provides more robust projections of Pension Credit entitlement, where the distribution of individual pensioner incomes is the key determinant. In particular, Pensim2 provides a technically superior approach to projecting future changes in the distribution of incomes from state pensions when entitlement to these is widening considerably over time.”
There we have it. It rather looks as though the Government are now more confident about their projections than they were before. I assume that it will be part of the Minister’s case that because they have Pensim 2 and the PPI does not, they are right and it is wrong. I am not in a position to make a judgment on that Mr. Taylor, and nor, I suspect, are you. I do not spend a lot of my time on dynamic micro-simulation, but I dare say it has its up side.

James Purnell: You should try it.

Nigel Waterson: Yes, it certainly sounds exciting.
I return to the Parliamentary Brief cover story that we discussed earlier, “Would you buy a pension from this man?”, and the comments of Mr. Steve Bee, who is a well-respected expert in this field. I reiterate that I shall not get into an argument about the meaning of the word “tax”. Steve Bee is content to describe it as a tax, but the Minister takes umbrage about that. I have no desire to get into what seems to be a purely semantic argument.
Mr. Bee’s central point is that for savers,
“the Pension Credit system will leave them just £11.70 a week better off than a non-saver. That is slightly more than a 40 per cent. tax on saving and is exactly why millions of people on modest earnings should be very wary indeed about this proposal for a National Pensions Savings Scheme.”
He then touches on the issue of how much people have to save, saying:
“If the loss of £8.30 in weekly income doesn’t sound much”—
and it does not—
“it is worth reflecting that the typical capital cost of that amount of weekly income for a 65-year-old is around £7,000 today.”

James Purnell: Does that mean that the hon. Gentleman’s policy is to abolish the savings credit? As he knows, that is what he has just described. Does he recognise that that would lead to an increase in the number of people on 100 per cent. withdrawal rates? That was the situation under the previous Government, when there were twice as many pensioner families on 100 per cent. withdrawal rates as there are now.

Nigel Waterson: No, I am not saying that that is our policy; indeed, if the Minister is patient, we will come out with our policies in due course, as I have explained before. What I am trying to find out from him, as the guy who is trying to introduce the system, is how he will deal with means-testing and, crucially, how it will affect the likely success of the personal accounts system.
In his article in Parliamentary Brief, Mr. Bee said that £8.30 of weekly income was the equivalent of about £7,000 today. He went on:
“A £7,000 investment that yields not one penny’s worth of value is a rather disastrous investment for anyone to have entered into voluntarily, let alone to have been swept into through the process of auto-enrolment.”
In conclusion, he said:
“The problem with a pension system where so many people could be potentially penalised by saving is that no financial adviser would ever recommend that saving for a pension was either suitable or advisable for everybody.”
What it comes down to is this: we are trying to help the Minister clear the ground. If personal accounts are to have a chance of succeeding, various things must happen. As I explained on Second Reading, they include restoring confidence in the existing pension system and sorting out the issue of levelling down. Crucially, they also include controlling and, if possible, reducing means-testing, the effect of which on pensions saving is bound to be pernicious—the word used by my hon. Friend the Member for The Wrekin—or cancerous, to use my own phrase. There is also the issue of potential mis-selling, on which we touched in a separate debate.
 However, means-testing is an extremely important part of the issue, and my concern remains that there is still a yawning gap between the projections made by the Pensions Policy Institute—a highly regarded independent body—and those of the DWP. However, I am always open to reason, and the Minister may well be able to take us through the differences in those assumptions and modelling techniques and to satisfy the Committee that the Government are more likely to be right, although I suspect that there is no right or wrong, black or white, in any of this. That would be extremely helpful; indeed, it would be almost as good as attending the seminar in a week or two’s time or the even better option of having had oral evidence from the PPI and the DWP’s boffins—had they been able to take time out from changing the oil on the Pensim 2 model to come along and talk to the Committee.

David Laws: Mr. Taylor, thank you and welcome back to the Chair for this afternoon’s proceedings. As you will know, I have not spoken for about 10 clauses, so I might be tempted to speak for a very long time to make up for that. However, as you might also be aware, I said a few things about means-testing on clause 19, so I might also be tempted simply to refer hon. Members to my earlier speech and to sit down. However, I am sure that hon. Members would not want me to do that, because this issue is crucial to the Government’s pension plans.
We know, from none other than Lord Turner himself, that it is crucial. In the commission’s final report, he said:
“Lower rates of return for individuals”—
he meant in relation to means-testing—
“and the possibility in extreme cases of negative real returns, would make it dangerous to proceed with an automatic enrolment system without individual advice, but introducing individual advice would substantially increase costs”.
The issue is therefore clearly critical.
 We know from this morning’s sitting that the Minister has promised us some information on 20 February, but we still have not heard from him on a narrower point: even given the Department’s assumptions about the number of people on means-testing in 20, 30, 40 or50 years’ time, what proportion of the target audience for personal accounts are likely to be subject to means-testing? The suspicion must be that the proportion will be an awful lot higher than the Government’s base figure of 30 per cent. If there are the fantastic models in the basement of the Department that the hon. Member for Eastbourne talked about, with all sorts of newfangled additions, it must be possible to come up with some sensible estimates.

James Purnell: I am afraid that I shall have to disappoint the hon. Gentleman. We are looking into that issue and we shall publish the findings in due course—we have steam pumping out of the DWP basement as we speak. He will note that in the target group people earning below £5,500 or so will not automatically be enrolled. He might want to take that factor into account.

David Laws: That is extremely helpful. We shall wait for the Government to publish those figures, which will add a lot to the debate about the risks of people being automatically enrolled in personal accounts. I hope that those figures will be available on 20 February, when we have our seminar.
 As we discussed earlier, the issue is important precisely because people must have a clear sense of what the returns will be before they decide to be automatically enrolled in personal accounts. At this morning’s sitting, I mentioned the apparent confusion in the Department over what the returns will be for people who are automatically enrolled in personal accounts. A new piece of information has become available since then. On Second Reading, the Secretary of State said in response to a question that I put to him that
“the vast majority of people will be able to look forward with some confidence to receiving £2 back for every £1 put in.”
That was the Secretary of State’s opening bid. Later in the debate he came back and clarified that he was talking about only
“a large majority of people with a good work history, saving from the age of 25”.—[Official Report, 16 January 2007; Vol. 455, c. 665-92.]
However, that is not the same thing at all.
The DWP then issued the paper entitled “Financial incentives to save for retirement”, which clarified that
“the system that we propose, in combination with the introduction of personal accounts, will see the large majority of people...expecting a payback well in excess of £1...for...£1”.
That is hardly an impressive payback at all, and will considerably change the financial incentives that people who are thinking of saving and personal accounts will face. That is particularly so if they are individuals with large amounts of debt, as many of them could be, who might therefore need to decide whether to pay that off before going on to save in personal accounts.
I thought that we had got to the Government’s bottom line on the issue—that £1 gives £2 in certain circumstances and £1 gives £1 in the majority of circumstances—until this morning when I received an answer from the Minister which was dated yesterday. I asked him what estimate he had of the proportion of the target audience for personal accounts that could be expected to receive a return greater than £2 for every £1 invested. The Minister’s answer actually says £2 million for every £1 invested, which would be extremely impressive, although I would want advice on the funds proposed. Assuming that the reply is an answer to the question that I put to the Minister about £2 for every £1, the answer is now:
“Information on the proportion of individuals who can expect particular payback rates is not available.”—[Official Report, 5 February 2007; Vol. 456, c. 660W.]
In other words, we have gone from £2 for £1 to £2 for £1 in some circumstances and £1 for £1, but now the information is not available at all, despite the dynamic and stimulating model in the basement of the Department, which the hon. Member for Eastbourne mentioned.

Nigel Waterson: Simulating.

David Laws: It is simulating and stimulating. If the model is so good, how can it be that from the starting point of giving such categorical advice and assurance as the Secretary of State was able to on Second Reading, with the majority of people getting £2 for £1, we now cannot say anything at all about payback rates? The Minister’s answer finished with the following sentence:
“The figures that the Department has show that while the payback depends on factors such as investment performance, the vast majority of people can expect to benefit in retirement from saving in personal accounts”,
which could mean anything at all. The Department has got in a bit of a muddle over the issue. It has been rowing back rather fast and I think that it is nervous about putting on the record what the returns will be, in case it cannot deliver. That is not a good background for launching the accounts.
This morning, we had a debate about the individuals who might be particularly vulnerable to losing money in personal accounts. The thrust of the Minister’s comments in that debate, when he responded to the hon. Member for Eastbourne, appeared to be that the Department was perhaps going to shave off some of the vulnerable groups such as the self-employed, or women in later life. The problem with that is set out very neatly on page 9 of the Department’s paper, “Financial incentives to save for retirement”, where it says that
“a level of payback cannot be guaranteed, and the choices and characteristics which may leave a small number of people at higher risk of low payback may not be apparent to either individuals or Government during working life”.
In other words, there will be some fundamental uncertainties that will make it difficult in a mass means-tested system to filter out people who may be vulnerable. That is well highlighted by the PPI report, “Are personal accounts suitable for all?”, which helpfully goes through a series of categories of individual, described by contribution record, income decile and work characteristics, to figure out whether they would benefit from saving in a personal account.
Let us consider individuals with a full national insurance record, whether in the lowest income decile or the highest, which are categories that the Minister has not mentioned so far, and those individuals who are renting and likely to be receiving housing benefit. Even for a woman aged 40, the return would be something 50p for every pound put in. There are a lot of vulnerable people who might go into personal accounts and not be better off. It is not only those with high debt characteristics who are paying high levels of debt interest. We know how difficult it must be to cater for that type of person; the Government would not easily know what debts they had and what interest they were paying. There are also others who might not be better off, however: the self-employed; older people; people who receive housing benefit, and people who receive council tax benefit. The proposed new clause focuses on pension credit, but it relates to a lot of other means-tested benefits as well.

Andrew Selous: I am listening with interest to the hon. Gentleman, as always. Given the legal dispute about the guarantees in Government leaflets that is before the courts, has he given any consideration to the position of people who are auto-enrolled in personal accounts and later find out that that is not the best thing for them, and the sort of comeback that they may seek, whether against the Government, the board or the delivery authority?

David Laws: The hon. Gentleman is quite right to indicate that people automatically enrolled in accounts by a Government who sell the scheme almost as a no-brainer saving scheme, because one gets £2 for every £1, would be very angry if they found that they were losing money as a consequence of investing in the scheme. They would certainly mount a claim for compensation and they would look closely at what Ministers and others have said about the benefits of the scheme. Perhaps that is why the Government are desperately rowing back. If those individuals were able to demonstrate that the Government were saying that the vast majority of people would get £2 for every £1 but that it had been shown later that that was going to be only 50, 40, 30 or 20 per cent., they would have a strong compensation case.
The Government will have to be very careful about what they say, and the more careful they have to be the more questions they are likely to raise in people’s minds about whether they should have personal accounts.

James Purnell: I will answer the main points that the hon. Gentleman is making, but I feel that he is quoting the paper out of context. That is merely a disclaimer about the fact that it is a set of projections across the whole of the population, and one cannot foresee every single circumstance. That is not hugely different from the PPI paper, which says:
“This paper is intended as a contribution to the policy debate on Personal Accounts. It should not be relied on by individuals or their advisors as the basis for saving and investment decisions.”
We are trying to inform public debate. There is a difference between making projections for the whole population and giving individual bits of advice.

David Laws: I am grateful. I am not sure which comment the Minister is saying that I was taking out of context, the one from the Secretary of State or the one on page 9 of the DWP paper, which says that:
“level of payback cannot be guaranteed, and the choices and characteristics which may leave a small number of people at higher risk of low payback may not be apparent”.
 James Purnell indicated assent.

David Laws: I think that the hon. Gentleman is nodding to show that that is the sentence, but I am not sure what his complaint is. It seems clear to me what that refers to. Surely it means that because we do not know at the beginning of somebody’s working life whether he is going to end up on housing benefit or council tax benefit, or for how long he is going to work—he might end up with caring and other responsibilities—we cannot just run the Pensim model and say for certain to an individual at a particular age that he will benefit. The more uncertainty there is about those characteristics, the less attractive it will be to save.

James Purnell: The hon. Gentleman must recognise that that will be the case for any projection over 50 years. It is perfectly possible that he will come into Government and get rid of housing benefits in 40 years’ time. Does that mean that anybody who has not saved on the basis that he might end up on housing benefit will have been mis-sold because he changed Government policy? Of course there will have to be a general qualification about projections over many years.

David Laws: The Minister says that there will be a general qualification. There was not a lot of general qualification about the first thing that the Secretary of State said to me on Second Reading, when he said that the vast majority of people could expect £2 back for every £1 put in. If the message that the Government are sending out is “invest in this scheme with confidence; it is almost a no-brainer to get a decent return,” that is very different from an extremely qualified set of statements that point out to people that if they fall into five, six, seven or eight different categories, they might end up losing from saving.
My point, which I think the Minister understands, is that there is great risk in a system in which a large number of people who have personal accounts face means-testing, and there is much danger for the Government in giving general advice that appears to indicate to people that it is almost a no-brainer to go into the scheme.
Because, as the hon. Member for Eastbourne suggested, people have very low financial literacy, they will make decisions in a broad-brush way, depending on whether they think that going into personal accounts is an obviously sensible thing to do. The more they are advised—whether by the generic form of financial advice that the Government are talking about; by a leaflet; by what the Secretary of State says or by what the Daily Mail says—that the matter is complex and uncertain, the more likely they are to say, as many people seem to be doing at the moment, “I am not going to bother with this; pensions are far too complicated. Why don’t I just stick my money into a house instead?” That is the risk of building this type of personal account scheme on top of a low basic state pension with a lot of means-testing. Those are the issues that the Government have to clarify.
The hon. Member for Eastbourne put that case very well, but I have to point out gently that he is not proposing much that would make a great difference. He is entitled, as are the Government, to throw stones at my party for wanting to spend more on the basic state pension, partly to reduce means-testing. However, if he is not going to do that, the price that he and the Government have to pay is that there will be a lot of means-testing in the system for a long time to come. He offered a very vague hope, designed to be a key differentiator between the Conservative party and the Government, when he said that what he is after, unlike the Government, is a consensus on an aspiration for less means-testing. The hon. Member for Runnymede and Weybridge explained what that meant on Second Reading, when he indicated that he hoped that in 20, 30 or 40 years’ time there might be less means-testing in the system.
I cannot really think that that will be the basis for a particularly popular and successful campaign that will sweep across the country. I can hardly see pensioners chanting in the streets, “What do we want? A consensus on an aspiration for less means-testing. When do we want it? When it is fiscally prudent.” I understand the points that the hon. Gentleman is making, but he is throwing darts at the Government without having policy of his own that would achieve anything different. The point here is that if this or any other Government decide to scrimp on the level of the basic state pension, they will have to accept the very high level of means-testing, which may be the fatal flaw that undermines the success of these proposals.

James Purnell: This has been an important debate and no worse for hearing it for the second time today from the hon. Member for Yeovil. I want to address head-on the points that both hon. Members have made.
I start by saying that what we are doing here is implementing the recommendations of the Pensions Commission. It produced some very well-thought-through research and evidence for its sets of proposals. Anyone who wants to move away from those needs to explain how they will afford to do so. There will, of course, be a balance within any system between the level of the safety net and the level of the universal benefits. Some people will think that there should be a contributory element. That is what the Pensions Commission recommended. We agree with that. We think that it strikes the right balance between benefits that go to people on a contributory basis and benefits that protect people against poverty or give them money if they have extra needs based on disability or caring, for example.
For those on both Front Benches to have credibility in this debate, they have to say how they would fund a system that would produce a different outcome. We have already been through the proposals of the hon. Member for Yeovil. He cannot tell us either where he would get the 5p to get to £115 or what he would do about the majority of pensioners who would be above £115 in 2050. If he is telling them that he will improve their incentives to save by getting rid of the extra money they receive because they are disabled, I am not sure that that will have them chanting in the streets at the next election either. He has refused on a multitude of occasions to answer that question because he knows that it is the fatal flaw in his policy.
The hon. Members for Runnymede and Weybridge and for Eastbourne have slightly the same problem. They like to make this rhetorical case about means-testing in general, but when there is a proposal to reduce means-testing in practice—the changes that we are making to the savings credit—the hon. Member for Runnymede and Weybridge says:
“I want to highlight ... the proposed change to pension savings credit that will create a band of 100 per cent. withdrawal rate... Almost 1.5 million pensioners will be worse off... I urge the Minister to look again at that provision. I guarantee that our colleagues on both sides in the other place will want to do so if he does not.”—[Official Report, 16 January 2007; Vol. 455, c. 680.]
The whole point of what we are doing here is to reduce the overall level of means-testing. As the hon. Member for Runnymede and Weybridge said, there are two ways of doing that. Either one can have universal benefits, in which case one needs to say where the money for doing so would come from, or one has to reduce the generosity of our current targeted system. We think that the savings credit needs to be altered so that we reduce the overall level of means-testing. Presumably the hon. Member for Eastbourne agrees with that objective. If so, I do not see how he can say that he does not agree with the changes that we are making to the savings credit.
 It is no great help to the debate to talk about the problem of means-testing in general, but, when the Government come up with practical ways of reducing the amount of means-testing, oppose them on the basis that they are taking money away from people. The fundamental reason why the Government have brought in pension credit is to target the people who have the least resources and to strike that balance between redistributing to the poorest and making sure that pensioners share in the overall prosperity of the country.

Mark Pritchard: Given that the Government are introducing measures to reduce means-tested benefits, does the hon. Gentleman then by implication and even by definition agree with us that means-tested benefits are, to quote Help the Aged, “pernicious”?

James Purnell: No, I do not. The whole point is that we must get the balance right. We must have the right level of pension credit to target poverty, people with disabilities and people with greater caring needs. I am sure that the hon. Gentleman is not saying that he wants to take money from those people and the £30, £40 or £50 a week they receive for those extra needs and because they have lower incomes. The level of means-testing must be right, and that is the debate that we are having today.
If we had not changed the system, the percentage of people on means-testing would have approached 70 per cent. or more, and that would have been too high. We believe that the changes—both the savings credit fix and the changes to the basic state pension—will ensure that we have a pension credit system that is properly targeted, and works as an insurance system for people with unsuccessful work careers, by providing a safety net against poverty, and for those with greater needs in retirement, who should be given more help. If the hon. Gentleman wants to tell his constituents that he against that, he is welcome to do so when he intervenes.

Mark Pritchard: For the sake of clarity, will the Minister say what would be an acceptable level of means-testing—he has mentioned various percentages—and an unacceptable level?

James Purnell: It was never the Government’s intention to go to 70 per cent. or more of people on means-testing, and that is why the Bill ensures that the proportion falls from about 45 or 50 per cent. at the moment to the 30 per cent. or less that we believe the proposals will bring about.

Nigel Waterson: May I pursue the point made by my hon. Friend the Member for The Wrekin, because it is important? The Government’s view is obviously that 29 or 30 per cent. is about the right, or acceptable, level. Presumably, one reason for the fierce debate behind the scenes with the PPI is that they believe that 45 or 50 per cent. is unacceptable. Is that right and, if so, why?

James Purnell: We think the proposals are sensible. In 2050, for example, half of those on pension credit will be those with extra needs because of disability or because they are caring. It is right that they should be provided with help. We do not think it would be a great boon to humanity if we took money off them as a way of reducing the number of people on means-tested benefits. I disagreed earlier that means-tested benefits are a tax, because they give more money to people. It is a good thing, not a bad thing, if someone whose wife suddenly becomes disabled receives extra money from the state. It is not a tax that takes money from people. That is the point that I have been trying to make since this morning. I shall come to the detailed points that the hon. Member for Eastbourne made about the PPI, and with that slightly prolate preamble, I shall turn to my speech.
 We have set out our long-term projections for pension credit entitlement. I shall deal with the comments made by the hon. Member for Yeovil under three headings. The first is the exact intention of his amendment and why we believe the DWP’s approach is the right one, and I shall set out the forecast that we intend to provide. The second is the overall number of people on means-tested benefits. The third is incentives to save, and means-testing.
We supplied our long-term projections for pension credit entitlement in the RIA that accompanies the Bill, and we published modelling assumptions underlying our projections and had them validated by the IFS. We have also published a document on financial incentives to save.
In response to the points made by the hon. Member for Yeovil, I should like to say that there is a balance between trying to answer people’s questions in parliamentary debates and publishing detailed 40 or 60-page documents. If he wants me to reply to his questions by saying that he can read our “Financial incentives to save for retirement” document, I am happy to go do so. However, if he wants me to try to be helpful, I hope that he will treat those contributions in the context in which they are given—as part of a parliamentary debate.

David Laws: All I was saying, which I think is a fair point, is that I cannot understand how the Secretary of State can say in the House that the vast majority of people will get a return of £2 for every £1 put in. He says in a parliamentary answer that information on the proportion of individuals who can expect particular payback rates is not available. If it is not available, how can he make that comment?

James Purnell: Later on, the Secretary of State made it clear that he was saying that the vast majority of people with a full working life would have those expectations. The point that we have consistently made is that means-tested benefits are there for people who do not have successful working lives to give them insurance against ending up in poverty. One could have a 100 per cent. incentive for everybody to save by saying, “Whatever you end up on through your own provision and saving is what you will get in retirement”. I do not think that the hon. Gentleman is proposing that system. He may want to say that that is what he is proposing, but even his proposals will have a means-tested safety net—he has acknowledged that previously.

David Laws: It is an oxymoron.

James Purnell: Well, I shall turn to that later, when I shall make the point that the proportion of people on guarantee credit is virtually the same under our proposals and the Pensions Policy Institute’s proposals. That is really where the kernel of this debate lies.
 New clause 2 asks for a five-yearly report on information on pension credit. I hope that we can do better than that as we already regularly publish that information—usually annually. The Department already publishes annual long-term estimates of benefit expenditure, which include pension credit. Those estimates also feed into the Treasury report on long-term fiscal sustainability. Estimates of current and projected case loads are used to calculate those expenditure projections. We shall publish those case load projections for the first time this month. As with the expenditure estimates, those projections will then be published annually. Rather than accepting an amendment that asks us for those figures every five years, it would be better to stick to the current practice of doing so every year.
Estimates of current pension credit take-up are included in the annual “take-up of income-related benefits” reports published under the independent national statistics guidelines. The number of pension credit recipients is published quarterly on the DWP website. I hope that the hon. Member for Eastbourne is satisfied that we are not shying away from publishing such information.
 The hon. Gentleman also asked that the five-yearly report be produced by the Government Actuary. We do not believe that that is the right approach. The Government Actuary provides advice to Parliament on national insurance contribution levels and benefits, and provides oversight in relation to the national insurance fund. However, pension credit is not a contributory benefit; in other words, it is not based on a person's national insurance contributions. The Government Actuary's Department has never had responsibility to report on benefits that are income-related. Indeed, that is not just our view; it is the view of the recent Morris review of the actuarial profession, which recommended that, for policy and operational reasons, projections of benefits paid from and contributions paid to the national insurance fund should also be covered by the DWP and Her Majesty’s Revenue and Customs. Any suggestion to increase the remit of the Government Actuary's Department to include income-related benefits would go against that and other recommendations in the Morris review. Therefore, I see no reason for legislating to produce information less frequently or for removing those responsibilities to the Government Actuary. However, I realise, of course, that the purpose of these amendments is to elicit a general debate and I will now turn to that.
Let me start by saying that the PPI is a highly respected body and it is true that forecasts spanning 30, 40 or 50 years require a wide range of often quite bold assumptions. Depending on those assumptions, one can come out with quite different results. It would not be appropriate to think in terms of what is the right or wrong outcome as the question is what are the appropriate assumptions and what does the model allow us to do? The DWP and PPI estimates are the result of detailed underlying assumptions and the projections used to produce them. At a basic level, we are saying that the Government project that improvements in future pension incomes will tend to be more focused on lower-income pensioners and will push more pensioners clear of pension credit entitlement. The implication of the PPI’s findings is that lower-income pensioners will see less improvement and that therefore more will remain eligible.
There could be a number of reasons for the difference in projected outcomes. First, as the hon. Member for Eastbourne said, there is a difference in the assumptions that we make about private pensions. Both projections assume that private pensions income will fall relative to earnings, so our projection about private pensions is not hugely optimistic. The estimates are cautious; if personal accounts are successful, as we hope they will be, the amount of saving will be greater than that suggested by that basic case.
 The key point, however, is that under our models we and the PPI agree that the amount of private saving makes a relatively small difference to the overall number of people on pension credit. Perhaps a more significant difference is how we assume the increase in spending on the state second pension will be distributed; the differences between our projections and the PPI’s largely revolve around S2P. There is no difference between us on the projection of total S2P expenditure in 2050, but it seems likely that we are making different projections about which pensioners receive the money and how much they receive. That is the crucial point.
Spending on S2P will increase more than fivefold by 2050 in real terms as more and more pensioners have the chance to build up substantial S2P records and as the improvements to S2P coverage in the Bill take effect. As the hon. Member for Eastbourne said in detail, the modelling approach of the Department for Work and Pensions uses Pensim 2, which directly models the build-up of S2P by people as they go through their working lives. We believe that that provides the most realistic projection of how S2P entitlements will be distributed in future. Pensim 2 is a very sophisticated model, and the one that the Pensions Commission used as a key tool for much of its analysis.
As I started to say earlier, the methodology and equations underlying Pensim 2 have also been validated by the IFS. Members with an interest in the matter can find the IFS findings and recommendations for further development in a working paper on its website; I am sure that Members will look at that with keen interest.
 The Pensim 2 model makes projections based on people and their forecast likely S2P and other entitlements. PPI uses a very different approach. It takes information on current pensioners and projects the current distribution forward using a number of assumptions and adjustments. Clearly, we believe that the approach used by the Government and our analysts is robust, because it is based on the contribution histories and projected working careers of individuals. We therefore think that it is an effective way of modelling what will happen with S2P and who will benefit from it. It also fits closely with what we should expect to happen.
The Bill will substantially increase spending on the basic state pension by improving coverage and uprating in line with earnings. Spending on the state second pension will also increase, with better coverage and more focus on low earners. As I said at the outset, we are proposing to limit the scope of pension credit relative to general income growth. In that context, it is hard to see why pension credit entitlement would not fall below the levels that we see now.
We feel that our projections are good at modelling the distribution of S2P. Furthermore, it would be surprising if all the changes—the increased spending on the basic state pension and S2P, the greater redistribution and the fact that the coverage measures will particularly benefit low earners and those with interrupted careers—did not result in the kind of reduction that our model forecasts.

Nigel Waterson: I shall give the Minister a chance to gather his thoughts. Does the PPI accept that a large part of the difference is as he described, and does it accept that its assumptions are less sophisticated than Pensim 2? Has there been any discussion about allowing the PPI access to the Pensim 2 model to run its own calculations in order to see whether the gap can be narrowed between the two parties?

James Purnell: I do not think that the PPI’s assumptions are more, or less, sophisticated. It is just that it has a different approach to modelling. When the hon. Gentleman comes to our seminar, he can ask those very questions if he wants to.

Nigel Waterson: I hope that we will have a tour of Pensim 2, which I envisage as being like the Enigma code-breaking machine, in several Nissen huts full of whirring machinery with WRENs servicing it. That will all be very interesting and I hope that the working paper to which the Minister referred will be available, along with any others that there may be. It is important to establish whether it is accepted on both sides that the Pensim 2 model is more sophisticated and therefore likely to produce more accurate results. It seems such an obvious way to narrow the big gap between the PPI and the Government.

James Purnell: That illustrates the slightly difficult position that we are in regarding our response to the hon. Gentleman’s desire for a consensus between ourselves and the PPI. All we can do is explain to the PPI, or others, the basis of our forecasts and if it continues to be confident about its forecasts, we cannot countermand that and force it to reduce them. I am being very careful not to say that its methodology is any worse or better than ours—it just uses different methods. All I am saying is that our methodology has an advantage in the modelling of distributional effects.
Moreover, it would seem odd if, despite the changes I have suggested, one ended up with the same level of entitlement in 2050, compared with what we have now. Our forecasts have those methodological features and they also fit with what common sense suggests would happen based on the changes we are proposing.

David Laws: The PPI figures obviously have a huge funnel of doubt in 2050, with a minimum means-tested figure of 30 per cent. and a maximum of 65 per cent. Will the Minister remind me whether his colleagues in the Department have a similar funnel of doubt in relation to the central estimate, or is there simply a point estimate?

James Purnell: As the hon. Member for Eastbourne said, we looked at two models when preparing the White Paper, which produced two slightly different results. Under Pensim 2, we came up with a figure of 27 per cent., and we got a figure of 32 per cent. under PSM—the pensions simulation model. I am sure that I shall be corrected if that turns out not to be the case.
I am sure that the hon. Member for Yeovil has read our document on projections of pension credit entitlement. It goes through a range of issues and assumptions, which, if varied, would affect the overall outcome. If he reads it, I think he will find that it makes a persuasive case that the projections are pretty robust and that changes in assumptions make relatively small differences to the overall outcome.

David Laws: I am sure that I have, at some time in my life, read that document, but at the moment my memory is not working as well as it ought to. Would the Minister refresh my memory and tell me what the funnel of doubt is in the Government figures for 2050? What is the range that the Government have for means-testing in 2050, compared with the PPI range of 30 to 65?

James Purnell: That is a slightly different approach from the one that we take. We went through various different components and different assumptions to see the overall effect that that had on the proportion in 2050. For example, the White Paper assumptions led to a 27 per cent. forecast under Pensim 2. We varied that when we considered a scenario dealing with high employment, lower life expectancy and higher private pension outcomes—a sort of more optimistic model—and the figure that came out was 25 per cent. Scenario 2 featured lower private pension incomes, which led to a figure of 28 per cent, so the funnel of doubt relating to those figures ranged from 25 to 28 per cent. The more assumptions one varies, the more the funnel of doubt will change. Adding together all the lowest scenarios will create a lower floor, and all the higher ones a higher floor. From memory, the outcomes that we projected were pretty robust under the scenarios modelled. I am sure that the hon. Gentleman can read the document happily and come back to it on Report if he so wishes. The key point of the document was that it demonstrated pretty well that our forecasts were robust under a range of different scenarios.
That is about as much as I can say on the different forecasts. We think that our figures are robust. We have discussed them in detail with the PPI and we will continue to discuss them, including at the seminar, which I know that you are looking forward to, Mr. Taylor, as are our colleagues on the Committee, all of whom are invited. We will have an opportunity for discussion there.
The hon. Member for Eastbourne, I think, mentioned the latest PPI briefing, which said that pension credit levels would remain historically high in 2050. Our forecasts do not suggest that that would be true, because the levels would have fallen from 45 to 50 per cent. now to around 30 per cent. in 2050. We think that they would not be hugely different from the figures that applied in the early 1990s. Indeed, spending on all income-related benefits for pensioners would have fallen from about £1 for every £5 spent on pensioners now to 35p for every £5 spent on pensioners in 2050. That would be a significant reduction in the proportion of pensioner benefits spent on income-related benefits. One would therefore project that, by historical standards, the level was significantly lower than had operated at that time. Again, we will have time for discussion at the seminar.
The final issue is on means-testing and “it pays to save”, carried over from this morning’s debate. We have already published an analysis of the expected payback in personal accounts. We will continue to develop the analysis and give people the opportunity to look at our projections in detail. I hope that when we publish that information and go through all the particular cases, the hon. Member for Yeovil will use them in an appropriate way, because he is very fond of saying “mis-selling”. I think that he should try to define what he means, because “mis-selling” is a very specific word. I hope that I can address his concerns about the overall policy, because I do not think that his view is that, if there is any means-testing in the system, automatic enrolment will be mis-selling. He can correct me if he wants to, but if that is his position I do not think that he is part of the consensus.

David Laws: I am sure that the Minister would agree that what would be mis-selling would be to say that the vast majority of people were going to get a return of £2 for £1, when that was not true.

James Purnell: Obviously, if the personal accounts board put that on its publicity, ignoring the regulation in place at the time, and knowingly said something that turned out not to be true, the hon. Gentleman would then be able to apply the word. That is very different from talking thus about the projections we have put forward and the overall policy. I think this is fair comment, but he sometimes likes to imply that if there were any means-testing in the system then automatic enrolment would be means-testing, and if there is anybody who is means-tested and does not get 100 per cent. of what they put in then that somehow would be mis-selling. Presumably that would apply to anybody who was taxed in retirement as well. I notice that he is not getting up. The point that I am trying to make is that his issue is not with the policy overall, but about the level of means-testing. I think that he recognises that we need to strike a balance there, and so does our policy.

David Laws: Does the Minister understand my point that even the Secretary of State in the House of Commons needs to be corrected about what the returns are from personal accounts? Potentially, we have quite a big issue. Had I not corrected what the Secretary of State said, it would be on the record as an inaccurate statement of the returns from personal accounts.

James Purnell: No, the Secretary of State made the position clear. He said that the vast majority of people who saved throughout a full working life would get a very good return from personal accounts. That is quite right. If the hon. Gentleman wants, we can just stick to publishing documents. He can then stick to asking questions and we will stick to replying to them on paper. If he wishes to do that, the debate will not be very informative.
Let us see whether the hon. Gentleman really believes that “mis-selling” is the right term to use. I hope that I can convince him that, overall, the policy is not characterised by mis-selling and that he will stop calling it that. He must justify why he is using that word, because it echoes outside here and if it does not stand up to scrutiny there is a danger that he will discourage from saving those who should be doing so.
We need to start by defining what the hon. Gentleman means by “mis-selling”. For a personal pension, it means selling an individual a pension that is not the best option for them. To achieve the best possible advice the sale of personal pensions is highly regulated, which means that the sales process is detailed, complicated and therefore expensive. That has two effects. Because the process is complicated, fewer individuals take out a pension, and because the transaction cost is high, charges are high and returns are therefore lower. Many commentators have suggested that it is therefore not economical to sell to low to moderate earners.
 Dealing with that problem was one of the Pensions Commission’s main goals. It wanted to create a system in which take-up was much higher and charges much lower, and it recommended that we automatically enrol employees into a personal account for their company pensions. It made it clear that for automatic enrolment to work individuals must be able to choose whether to stay opted in, based on generic rather than individual advice. That is my key point: that was the Pensions Commission’s recommendation, and if the hon. Gentleman does not agree that it is appropriate, or if he believes that the overall recommendations amount to mis-selling, he must say so. I am sure that he looks forward to defending his position at the seminar that is coming up.

Mark Pritchard: I do not want to be too helpful to the hon. Member for Yeovil, but he was trying to say that perhaps there has been misapplication of the facts, given that the facts are not yet known. Therefore they cannot, by definition, be facts; there can only be a presumption that they might or might not become facts. There is a great deal of difference.

James Purnell: I really did not understand what the hon. Gentleman said. He is obviously cleverer than Adair Turner too, and he can put that point to him when he comes to our seminar.
We are seeking to achieve the implementation of the Pensions Commission’s overall recommendations. We shall try to do so through this Bill and the Bill on personal accounts that we hope to introduce next year. We have made it clear that personal accounts will be regulated as occupational pensions, and we are considering which organisation will be responsible for that. As part of the next Bill we will debate the criteria for the regulation of personal accounts, including automatic enrolment, and the process by which people can decide what is in their best interests.
 If the position of the hon. Member for Yeovil is that automatic enrolment will only be appropriate if every individual who is automatically enrolled stays opted in, he is parting company with the consensus. There will always be individuals who do better at a particular time by not saving, such as those who decide to pay down their own debt, and those who are self-employed will have to decide whether to opt in to personal accounts. That is why personal accounts will be voluntary, not compulsory. Whether to stay in them will remain the individual’s decision. On the other hand, if the hon. Gentleman believes, as we do, that automatic enrolment is the right policy, as the Pensions Commission recommended, we all need to apply a slightly different test. Again, we can debate that over the next few months. My starter would be that automatic enrolment would be justified if it would be in the interests of a large majority of individuals.
The Pensions Policy Institute, which the hon. Gentleman likes to cite in support of his arguments, came up with a pretty similar formulation of the appropriate test. It said, for example:
“If personal accounts are not suitable for everybody, then this would not necessarily mean that individuals should not be auto-enrolled.”
In fact, it said:
“There is a broad degree of consensus for the principle of auto-enrolment.”
It also said, and we agree, that if there were people for whom personal accounts were not suitable, that
“would have important implications for what information is needed to help people make informed decisions about whether they should opt out.”
That is where the debate goes next—to the subject of the provision of generic advice and how we can give people who are automatically enrolled the right level of support. That is exactly what we are doing through our pilot with the Treasury and through the Thoresen review of how generic advice could be made to work.
The key point is whether the hon. Gentleman agrees with the PPI or whether he thinks that automatic enrolment is not justified if anyone is means-tested. He answered that question earlier when he said that his concern was about the proportion of people who were means-tested. I wonder whether that is really what he thinks. For example, in the mid-1990s, 1.7 million families were on 100 per cent. withdrawal rates. Today, the figure is 800,000. That is in part because we have introduced the savings credit. It has a slower taker rate, which means that fewer people are on 100 per cent. withdrawal rates. Mathematically, he will understand, if one takes a benefit away more slowly, more people will be affected by the means test.
There is an inevitable balance between taking money away from people quickly but over a small range of income distribution and taking it away more slowly but over a slightly wider range of income distribution. We think that our policy—combining guarantee credit for the poorest and savings credit for those above that—is the right balance, and the National Institute of Economic and Social Research, which is a respected independent commentator, came broadly to the same conclusion when it considered our policy.
The key point is whether the hon. Gentleman thinks that people on savings credit have a good incentive to save or not—we do. As we said in the document “Financial incentives to save for retirement”:
“A long-term saver in personal accounts receiving Savings Credit (but no other benefit) in retirement, for example, could expect to get back around £2 in real terms for every £1 they have contributed after taking account of the benefit system.”
By and large, with all the caveats we expressed in the document cited by the hon. Gentleman—because, for example, we do not know what the performance of the stock market will be over the next 40 years; one always has to caveat such things because all sorts of saving involve some risks and he would not want to pretend otherwise—we believe that people on savings credit will have the returns to save that I have quoted and significantly better returns to save than under the current system.
I hope that I have dealt with the hon. Gentleman’s point about savings credit. I do not know whether he still thinks that people on savings credit would have been mis-sold pensions. The debate focuses on people on guarantee credit. Under our projections, about 6 per cent. of people end up on guarantee credit, where they could theoretically—I will say something about that later—face 100 per cent. withdrawal rates. It is interesting that that is roughly the same proportion as the PPI’s citizens pension model, which is the inspiration for the hon. Gentleman’s policy. We are dealing with two different policies—the first the citizens income and the second a situation where we still have a second tier in the state second pension that gives people more than that citizens pension. They both end up with broadly the same proportion of people on guarantee credit.
Does that mean that automatic enrolment is not justified in either situation because a proportion of the population are potentially on 100 per cent. withdrawal rates? I do not think so, essentially for two reasons. First, people in that group would be unlikely to have accumulated significant savings, as they would not have been automatically involved for many years. It is likely that they would be able to take their pension as a lump sum, under the enticingly entitled “trivial commutation rules”, of up to £15,000. It is likely that even people in that group, who might be on 100 per cent. withdrawal rates in theory, would be able to take a lump sum of up to £15,000 and receive a benefit from their saving.
Secondly, and more importantly, the guarantee credit gives people money. The key point is that it is a safety net for people who, by definition, have had unsuccessful financial lives. Some 6 per cent. of the overall pensioner population will be on guarantee credit under our forecast. At the age of retirement, that is only one in 50, so about 2 per cent. of people will be on guarantee credit. We are discussing a particular part of the population: people who have not been able to provide for themselves because, for example, they were low earners, unemployed, had caring responsibilities, or would have contributed for less than 25 years out of the potential total of 50 years.
The guarantee credit recognises that that group has not been able to provide for their retirement, and it then lifts their income up to at least £115 a week. That cannot be described as mis-selling; it will protect people against those events in their working lives, and it would be exactly the same under the model that the hon. Member for Yeovil suggests. Given the difference between living on, for example, £80 a week or £115 a week, most people would choose £115 a week, even if that meant that they were in receipt of an income-related benefit.
I hope that I have explained why we believe that the system contains good incentives to save. It is worth remembering that we are discussing the poorer groups in retirement. The figures that we and the PPI have published are the harder cases out of the whole population. Our figures focus only on single pensioners; people who are in couples during retirement are unlikely to be on pension credit at all. Half of the people who receive pension credit in 2050 will be those who receive more money because of disability or because of caring responsibilities.
Although the hon. Gentleman will again refuse to answer this question, I doubt that he is saying that we should improve people’s incentives to save by taking that money away from them if they are disabled or have caring responsibilities. To do so would be to misunderstand the purpose of pension credit. It exists to insure people against certain events: either poverty during their working life, or disability or caring responsibilities later on. It gives them more money to meet those extra needs, and because of that, we have been able to lift millions of people out of poverty.
Those issues will remain whatever the hon. Gentleman proposes. Even if he could find the extra 5p on income tax to lift everyone to at least £115 a week, he would still have to tell the 70 per cent. of people who receive more than £115 a week in 2050 what he would do to them. Would he take money away from them, or would he have to find even more than 5p on income tax?
Overall, the proposals strike the right balance. They give people at the start of their working life a good set of incentives. The first time that someone is automatically enrolled at 22 years old, we will be able to say to them that if they work or care for most of their life, their state pension will give them about £135 a week—well above the level of guarantee credit. If they save over the long term, they can expect to receive well over £2 for every £1 invested—£2.50 or indeed more for many, as our document sets out.
If, on the other hand, their working life does not work out that way or they have extra needs in retirement, we will provide extra help. That is the right approach. Without reform, almost 80 per cent. of pensioners would have been on pension credit in 2050. Our reforms deal with that, although we have always intended that pension credit should act as a safety net for those who have not been able to provide for themselves. Because of these reforms, that is what it will remain.
I believe that is the right approach, and therefore hope that the hon. Gentleman will start to be slightly more sober in his use of language. If he believes that automatic enrolment with any means-testing is, by definition, mis-selling, then he should say so—and part with the consensus on the Pensions Commission’s proposals. If, on the other hand, he believes that there should be less means-testing, we can discuss that. He also knows, however, that there are only two ways of reducing means-testing; either by giving extra money to everyone, or by taking money off the people who receive pension credit. To have credibility in this debate, the hon. Gentleman needs to tell us which approach he intends to follow from now on.

David Laws: Mr. Taylor, I know that we have already had a long debate, but I want to respond to one important challenge that the Minister has set me. I confirm that I am certainly sober—particularly at 20 to 6 on a Tuesday afternoon—but the Minister challenged me to describe what I meant by “mis-selling”. It is worth responding, as I mean two things by it. First, a serious misrepresentation of the likely returns from personal accounts; I mentioned the first statement that the Secretary of State made on Second Reading, when he said that the vast majority of people could look forward to the two for one return. I do not know whether that was a slip or misunderstanding, but if the most senior person speaking for the Government does not use the right language, there is a danger of misrepresenting.
The other thing that I mean by mis-selling is the automatic enrolment of large numbers of people in accounts from which they might end up experiencing negative returns—almost the definition used in his report by Lord Turner. We remain concerned about that danger, and by that I mean people who put in £1 and get less than £1 back. The Government have to address some of those dangers in their proposals and in the generic advice that will be made available.

James Purnell: What proportion does the hon. Gentleman mean by “large numbers”?

David Laws: It would concern us to have any individuals not understand the risks; therefore, generic financial advice is important. I would, however, be concerned about the potential numbers when as many as 50 per cent. of the people going into personal accounts might be subject to means-testing. We will get clarification of those figures later from the Government, but the Government have to address that mis-selling risk. The Government also face risk in seeking to deal with that mis-selling risk; having told people the accurate returns that they may get in those accounts, they may find that the number deciding to go into them is much lower than they would otherwise have liked.

Nigel Waterson: The Minister’s message on this new clause seems to be “No More Mr. Nice Guy”. He is basically threatening to throw the hon. Member for Yeovil out of the consensus if he keeps using the word “mis-selling”, but the latter does not seem to be abashed by that and keeps using it. Presumably, his punishment will be not to be invited to any more seminars, so I will use the word “mis-selling” as often as possible in this debate.
With respect, the Minister had the argument completely the wrong way round by banging on about taking benefits off people with disabilities and other categories, and defending means-testing for people who clearly need help from the state—and probably always will need that help—rather than looking at our argument. Our argument is that the existence of mass means-testing is likely to undermine the system for personal accounts. The Minister might have avoided addressing that today, but cannot avoid doing so in the long run. The argument is not about means-testing as such, but about its real-world effect on this new system of saving for retirement, and whether it will work at all. We are concerned that we might inherit a system that is programmed to fail. With respect, that is the way to look at it in the context of this debate.
I am genuinely grateful to the Minister for explaining the different models so carefully. I have no way of knowing whether what he told me was complete gobbledegook or not, but I expect that we will hear more at his great seminar. Although the difference between a Committee and a seminar is that we do not have the benefit of a PowerPoint presentation, it seems to me that the biggest single factor in the difference between PPI and the Department for Work and Pensions is the matter of S2P, the projections of who will receive it and how much they will get. I have grotesquely summarised what the Minister was saying. That is very much a function of using Pensim 2 versus the projections used by the PPI.
We will return to the seminar, no doubt, and see whether we can achieve a consensus. Perhaps we can all be locked in, with the exception of the hon. Member for Yeovil, until a consensus is hammered out. Can the Minister promise us that there will be no question of having the Report stage before the seminar? That should not be difficult with the half-term break coming up. We need to test the robustness of the two positions, especially as both parties claim to have a very robust way of achieving their conclusions, which is always a bit of a worry if you are a layman in these matters, as I am.
I will not press my new clause to a vote. The Minister was good enough to point out that some of the information is already published, perhaps even more regularly than the new clause demands. I take his point about the relevance to the Government Actuaries Department; I was merely trying to inject an element of independence of provenance for these streams of data.
I was pleased but puzzled by what the Minister said about regulation—that indeed he was considering having a properly regulated system for personal accounts. There is a great fear in the industry that there will not be a level playing field, that personal accounts will be relatively unregulated, especially in view of our debate this morning about competing with existing pension provision, and that it would be unfair competition for that reason, given what the Minister said about rule 64 and the likelihood that that may be removed.
Finally, I have always had concerns about the rough justice argument, which asserts that because a large, relatively unquantified majority will be better off under auto enrolment into the system, we do not need to worry too much about what one assumes is the small minority for whom it will be exactly the wrong thing to do—people who should be opting out of the personal accounts system.
That brings me back to the issue of generic advice, how it is to be delivered, in what form and by whom. Invariably, Ministers fall back on trivial commutation  but it is not a great solution for people on low incomes anyway who have been putting money into pensions for some time to be told, “Well, at the end of the day you can always get your money back if all else fails.” We need to consider whether there are other ways in which they could use that money, to better financial effect, during their working lives, and how they are to be advised on doing so. Like the Minister, I look forward to what the Thoresen review has to say; I forget its time scale, but we need an answer sooner rather than later.
On that basis, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 5

Application of Freedom of Information Act to Personal Accounts Delivery Authority
‘(1) The Freedom of Information Act 2000 (c. 36) is amended as follows.
(2) In section 35 (formulation of government policy etc.) insert after subsection (2)—
“(2A) Information held by or provided by the Personal Accounts Delivery Authority is not to be regarded—
(a) for the purposes of subsection (1)(a), as relating to the formulation or development of government policy, or
(b) for the purposes of subsection (1)(b), as relating to Ministerial communications.”
(3) In section 36 (prejudice to effective conduct of public affairs) insert after subsection (2)—
“(2A) Information held by or provided by the Personal Accounts Delivery Authority is not be to regarded—
(a) for the purposes of subsection (2)(a), as relating to the maintenance of the convention of the collective responsibility of Ministers of the Crown, or
(b) for the purposes of subsection (2)(b), as relating to the free and frank provision of advice, or the free and frank exchange of views for the purposes of deliberation; or
(c) for the purposes of subsection (2)(c), as relating to the effective conduct of public affairs.”.’.—[Mr. Waterson.]

Brought up, and read the First time.

Motion made, and Question put, That the clause be read a Second time:—

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

New Clause 6

Review of role and purpose of Financial Assistance Scheme
‘(1) The Secretary of State shall commission an independent review of the Financial Assistance Scheme having regard (among other things) to—
(a) the efficiency and cost effectiveness of its administration;
(b) whether it could be more effective if administered by the staff of the Pension Protection Fund;
(c) whether it is adequately financed;
(d) what other sources of finance could be made available, including but not limited to unclaimed assets;
(e) whether it should be engaged in the purchase of bulk annuities.
(2) The Secretary of State shall publish the findings of such review within six months of this Act coming into force.’.—[Mr. Waterson.]

Brought up, and read the First time.

Nigel Waterson: I beg to move, That the clause be read a Second time.
This is a familiar argument, but no less important for that reason. New clause 6 deals with the financial assistance scheme. I shall begin with the specifics of the new clause. It requires the Secretary of State to commission an independent review of the FAS to consider, among other things, the efficiency and cost-effectiveness of its administration. Let me pause there for a moment.
We have always had serious concerns about the wisdom of setting up the FAS as a completely separate body, doing its own thing in a completely different part of the country, and we have always taken the view that the only possible reason for doing that was a political one: to underline the big disparity between the benefits paid by the FAS and the compensation paid under the Pension Protection Fund.
Just to sketch in a bit of history, the FAS was the illegitimate child of the 2004 legislation. It was cobbled together at short notice, and announced on 14 May 2004 at a point when the Government were in real danger of being defeated in this House by a combination of Opposition parties and Labour rebels, simply because a large number of people who had lost their pensions, through no fault of their own, would not fall within the PPF. In our view, the FAS was always misconceived.
The announcement in May 2004 produced a figure of £400 million, but no one was ever able to justify it. It was always as plain as a pikestaff that it was wildly inaccurate and inadequate. It now turns out that some 125,000 people were affected—the estimates were quite a bit lower at the time—so the Government have had a rather difficult time trying to squeeze potential claimants into the £400 million financial envelope that the Chancellor produced at short notice.
The FAS did not get off to a happy start. As it happens, when we were debating the Bill that became the Pensions Act 2004, I tabled an amendment suggesting that there should be a mini-PPF, administered by the same people who administered the PPF, to deal with claimants who came up prior to the due date for the PPF. We always accepted the principle put forward by the Government, although they rowed back from it in the latter stages of the legislation, that it was a bit like fire insurance—one cannot insure one’s house against fire after it has burned down—so there could not be an element of retrospectivity to the PPF, but it would have made much more sense to use the same expertise and skill set to administer the separate fund. At the time, we argued for it to be endowed with unclaimed assets—I shall return to that in a moment—under the umbrella of the PPF, which was starting its own life and which in many respects has drawn in a great deal of expertise and effectively administered itself since it was set up.
 Subsection (1)(a) deals with the efficiency and cost-effectiveness of the administration. Subsection (1)(b) deals with the point that I already made about whether the FAS could be more effective if administered by the staff of the PPF. I have little doubt that we should scrap the FAS as a separate entity and bring the whole administration within the PPF in the way that I described. Indeed, a review was carried out of the FAS—at the moment the name of the gentlemen who did it escapes me—which in many ways took the view that the administration should be shifted into the Pension Service itself.
Subsection (1)(c) deals with whether the FAS is “adequately financed”. I shall deal with that more broadly in a minute. Subsection (1)(d) reads,
“what other sources of finance could be made available, including but not limited to unclaimed assets”.
Subsection (1)(e) deals with whether the FAS
“should be engaged in the purchase of bulk annuities.”
So how is the FAS doing? Only today, we discovered in a parliamentary answer that it has finally provided assistance to some 871 people. That is a massive advance on the situation a few months ago, but it is still not terribly good when we consider the 125,000 people caught in this nightmare. And that is despite the fact that it has been in operation for almost 18 months. It is now, of course, closed to new applicants and seems to be taking on average at least six months to process a single claim.
The FAS was set up in York—almost as far from the PPF as it is possible to get—and it has already cost £7 million to deliver payments to just 871 people. Those figures came out the day before there was to be a demonstration outside Parliament on behalf of the Pensioners Action Group starting its High Court case against the Government tomorrow over compensation and the ombudsman’s report. We will come back to that report and the Government’s reaction to it in more detail when we discuss new clause 7 shortly. However, it seems clear to us that the FAS got off on the wrong foot and after a year and a half in operation only a tiny fraction of those who need help are receiving it. To use a phrase current in the Home Office, it is simply not fit for purpose—I have described already what I believe should happen instead.
So how should we deal with the FAS? The parliamentary ombudsman said in her report:
“I am quite clear that the FAS will not constitute an adequate and appropriate remedy for the injustice claimed by those who have complained to me”.
We have heard that the Government have provided extra funding for the FAS. In Department for Work and Pensions questions yesterday, the Secretary of State was worryingly vague about the extent of that commitment. Having carried out an analysis, with expert help, it seems to us that the Government have given an open-ended commitment to what is essentially a defined-benefit scheme compensating people under the FAS. It is difficult to see a limit on the Government’s liability. I hope that the Minister has had a chance to reflect on that since yesterday because it seems that the Government, who are claiming a figure of £1.9 billion, could be liable for quite a lot more, given the level of benefits established. Presumably, it will be easier to establish the total liability now that new claims under the FAS are out of time, as I understand it. If the Minister has more information, I would be delighted to hear it.
Our view is very clear. We think that the FAS has not been a success. If it was designed as a way in which to get the Government through a rough political patch, and through a general election campaign, it has been mildly successful, but it has not solved the long-term problems of so many people with legitimate needs for financial help following events completely beyond their control. Would it not make far more sense to fold the FAS administratively into the PPF, which will hopefully speed up the process by which people are compensated?
I will deal with all these points on finance in much more detail when we discuss new clause 7, if that helps the Minister and you, Mr. Taylor. Subsection (1)(c) of our new clause 6 relates to whether the FAS is adequately financed. That is also a key question if the Government are determined to keep it as a separate entity, subject to the point that I made about what limits, if any, there are on the Government’s stated liability.
 We have said that unclaimed assets are an obvious place to look, given that there is £3 billion of unclaimed pensions, which might be appropriate for the purpose I am discussing. For a long time, the Government’s mantra was that just because assets were unclaimed, it did not mean that they did not belong to people. That is true in theory, but a year or two ago the Chancellor did a 180° turn and is now looking at ways to grab unclaimed assets. I suspect that that is partly to make up the shortfall in funding for the Olympics. Clearly they are available and this is an obvious way to use them.
There is also a major issue about the bulk purchase of annuities. I know all the arguments about annuities and why they should be purchased in an ideal world, if one is a purist. However, the money available could go a lot further. I am not just talking about the money that the Government have already committed from the taxpayer or the unclaimed assets. We should remember that there are residual assets in these pensions, although they are admittedly inadequate for the purpose of covering all the claims.
Let us consider those things taken together. The money could go a lot further if, instead of buying bulk annuities with all the premium attached to the cost of that in the marketplace, it was spent simply on paying out to people on a regular basis the compensation to which they are found to be entitled. These are important issues, and I want to go into the financing of the claims in more detail when we consider the ombudsman’s report and so on.
 It is a crying shame and, as I have said before, a stain on this Government’s record that some of these unfortunates are having to appear in the High Court tomorrow to make a case for proper compensation. There is an extra dimension to this, because I understand that the Government have been playing hardball, as the Americans would put it, on the legal costs that would be incurred if claims were to fail. I am sure that there are precedents in respect of public interest cases, particularly given that this is essentially a class action, where Governments should not pursue costs because legitimate issues need to be considered. I do not want to stray into the realms of sub judice, but the Government should take a more emollient line. Why should these people be going to court at all? Why should they not be looking to the FAS to look after their legitimate interests? This situation is an enormous shame.
My final point comes up in spades in new clause 7, and we have made it many times, including on Second Reading. It seems to us that the Government have a major task to perform in clearing the ground for the new system of personal accounts. That means removing any factors within their control that are undermining confidence in the pensions system as a whole. I suspect that nothing has done more to undermine confidence, particularly among younger workers, about saving for pensions than the regular appearance of a lot of middle-aged or older men stripping off for the cameras at Labour party conferences or elsewhere to make their case about their lost pensions. Such events are extremely bad news for the whole pensions system and for the Government in terms of trying to build up confidence in pensions. That is why it is important that we air these issues as part of the debate on this Bill.

Andrew Selous: I agree with everything that my hon. Friend the Member for Eastbourne has said. I have an interest, because some of my constituents were affected by the events involving the Dexion pension scheme in Hemel Hempstead, which is not far from my constituency, and one or two were affected by the collapse of the Albert Fisher pension scheme, although that is somewhat further away from Bedfordshire.
I simply want to continue on the point of trust which my hon. Friend the Member for Eastbourne mentioned. I say this as someone who wants personal accounts to succeed, and who genuinely wants to be part of this consensus and to have a much better system of state and private pension provision. There is unfinished business here, and the Government have an obligation to clear the decks and try to get a slightly more just settlement for those 125,000 people who feel incredibly hard done by in terms of the guarantees that they thought they had.
It is all very well for people like us to stand up in Committee and elsewhere and make these points. I want to quote three paragraphs from a lady called Anna Roberts. She wrote this in 2003 when she was 33 in an excellent document that I have referred to before produced by Age Concern and the Fawcett Society. It was principally on women’s pensions, but the point that she makes here about trust is so relevant and shows why new clause 6 is important in helping personal accounts to get off to the best possible start. Anna Roberts said:
“I don’t have a private pension and have never seriously considered joining a pension scheme, despite working full time and earning a decent salary.
Like the majority of people I know, I am incredibly cynical about pensions and would rather look at other ways to plan for my retirement. I think that buying a property or investing in a second home is a much safer option.
I do not trust the pensions system. There are so many stories reported in the press about people who lose out after making years of contributions. At the moment I just don’t think it is worth taking the risk.”
I suspect that this lady’s view has become even more cynical, given the coverage that those 125,000 people have received.

Mark Pritchard: Likewise, I have constituents who have been affected by the Motherwell Bridge pension scheme collapse. Does my hon. Friend agree that while the financial assistance scheme gives some compensation, in the majority of cases it has not been full and complete compensation, which in itself has left people with a bitter taste in the mouth?

Andrew Selous: My hon. Friend is absolutely right. It was initially very minimal compensation. The Government have increased it somewhat. But I really come back to subsection (1)(d) of new clause 6, particularly in relation to unclaimed assets. I am surprised that the Government have not looked more closely at this area, particularly as they have looked at unclaimed assets, possibly in terms of the social investment bank which would do good works that we all would welcome in our constituencies. I think that these people who have lost out have a prior moral claim. As my hon. Friend the Member for Eastbourne said, we hear rumours that this money may be earmarked for the yawning gap in the budget for the Olympics in 2012. New clause 6 is an attempt to deal with the issue of trust so that we can get the system of personal accounts and this new settlement off to the best possible start.

James Purnell: It is quite right to say that the key issue around personal accounts and pension saving in general is people’s confidence in the system. The hon. Gentleman’s quote came from before the Pensions Act 2004 was introduced and before the introduction of the pensions regulator and the scheme-specific funding regime which, as we were discussing yesterday at Question Time, is in part responsible for company pension schemes being better funded than they have been since 1999.

Andrew Selous: Does the Minister believe that in 2007 people of Anna Roberts’ generation think that pensions are more certain and more trustworthy than in 2003, and that they are more inclined to go into pension schemes?

James Purnell: I cannot comment on the view of the public, but it is worth pointing out that we have the pensions regulator and the Pension Protection Fund. They give people the kind of safety net that the hon. Gentleman knows about from his experience on the Committee. It is important that we communicate to younger people who are thinking about saving in a company pension that the Pension Protection Fund exists.
If the hon. Members for Eastbourne and for South-West Bedfordshire were attacking a regulatory regime at all, it was the one that was put in place in the Pensions Act 1995, and the much-commented-on leaflet describing the 1995 Act in the terms that the now shadow Foreign Secretary used when he was the Minister taking through that Act. We have been defending that regime in the European Court of Justice and we will also defend it in judicial review this week. If he thinks that the regime that was put in place by the 1995 Act is insufficient in light of the 1983 insolvency directive, perhaps he will say so now.

Andrew Selous: I am grateful to the Minister, but I am a bit disappointed with the tone of his remarks. I did not seek to apportion blame either to his party or to mine. He is right in saying that the issues go back many years, but the important thing now is to consider how to provide a more just settlement for these people so that we can move the issue on. I am not hearing a solution from the Minister.

James Purnell: I was just responding to the hon. Gentleman’s challenge about how the situation has changed since 2003. Three key things have changed—the pensions regulator, the PPF and the financial assistance scheme have been introduced. They were not there before. If we are to discuss the matter, we need to do so on the basis of whether we think that the regulatory regime is right, and we have defended it in a number of court actions.
Just as important is whether parties are proposing to put more money into the scheme. The hon. Member for Eastbourne said on 27 June that he was not proposing to put any more taxpayers’ money into the financial assistance scheme. It would be easy if there were a pot of money out there that had not been allocated and could be spent on this. I shall respond to his remarks when I address that matter. What is clear, and I hope that he will make it so to people during the demonstration tomorrow, is that the Conservative party is not proposing to spend any more taxpayers’ money on the financial assistance scheme.

Mark Pritchard: Of course, in many cases there is a pot of money available—a pension fund. It might be that a company goes into receivership and that a pension fund is suspended. Does the Minister agree that there might be a case for investigating ring-fencing such pension funds and protecting them from high and excessive professional fees from receivers?

James Purnell: Of course, the remaining pension fund is used to pay out pensions, and the FAS tops that up. The key point towards which I think the hon. Gentleman is pointing is how quickly schemes wind up. As he knows, we recently published our review of the winding-up of schemes in which we made it clear that we thought that people should wind up their schemes within two years. I hope that that addresses his point that it should be done as efficiently as possible so that pension funds are not depleted by excessive administration fees. If that is the point that he was making, I strongly agree with him.

Nigel Waterson: The Minister seems to be a one-club golfer when it comes to the FAS; all he ever says is that the Tories will not commit any more taxpayers’ money. However, we have put forward a series of income and asset streams that could be used and tried to consider sensibly how people could be properly helped. All the Government ever seem to do is say, “Oh, it will cost some vast amount. It is a visit to another version of the Lib Dem Santa’s grotto. It will cost £15 billion, and the world as we know it will come to an end.” However, they should be considering some of the options and working them out. They have the resources to do that; why will they not?

James Purnell: I shall be talking about exactly those issues in my speech. If the hon. Gentleman thinks that I have not addressed them, he is welcome to intervene on me at the end.
 The amendment calls for a review of the financial assistance scheme. Members will know that we have been here before. The hon. Gentleman referred to the Galvin review, which we announced on 6 June and which reported in July. It was charged with considering what could be done to provide the best administration and management for the financial assistance scheme to ensure that people were paid as quickly as possible. The review also considered how to ensure the most cost-effective operation of the FAS and a full range of options for its organisation and location. The review was conducted by DWP officials, with representation from the PPF, seconded experts from the pensions regulator and significant input from the pensions industry.
 The review explicitly considered transferring the administration of the FAS to the PPF. In that particular case, the regulatory requirements faced by the PPF in respect of the transfer of FAS would have placed considerable strains on a small organisation in its first years of operation. Any PPF option would also require secondary legislation to extend the PPF remit, which could involve a significantly longer transfer process.
However, the review found that a number of recommendations should be acted on to improve the administration of the FAS. It recommended that a different skill set be brought in and that there should be a revised approach to gathering data, to speed up payments. It considered outsourcing and decided that it was not a viable option. Instead, it decided to bring such skills in-house; I shall talk about that a bit later.
The review concluded that the length of wind-up and competing trustee priorities were real constraints on making fast payments, that a detailed work analysis of the operational unit was required and that the long-term governance of the FAS was best placed in the Pension Service, which has the competence to operate the payment processing effectively and efficiently. Since July, we have worked hard to implement the review’s findings.

Nigel Waterson: Having said all that, and given that the FAS has had six months to implement the recommendations for improvement in the service, is the Minister satisfied that as of yesterday only 871 payments have apparently been made, of the much larger number still being processed?

James Purnell: I will come to that in my speech; I shall try to explain the main hurdle in paying more people. It is worth saying that there is no way we should be paying 125,000 people because the vast majority of them have not yet retired. The financial assistance scheme pays only those who have reached retirement age, survivors and, in some cases, the terminally ill.
The review looked into what the key barrier to making faster payments was. That key barrier is data collection. We need to get data from schemes about all individual members and the rights that they have built up so that we can work out how much to pay them. That barrier would arise in pretty much any scheme that the hon. Member for Eastbourne wanted to come up with. Unless he wanted a flat rate to be paid to people regardless of how much they had contributed, any scheme that he came up with would have to go through the process of calculating how much individuals were owed and to what level they should be topped up. In this first stage, that requires significant work and has led to the six-month delay that the hon. Gentleman mentioned. That is the up-front process, going through all the schemes working out people’s entitlement. Once that has been done, the process should be relatively simple. At that stage, we shall just be paying people an amount that has been calculated, which will be a relatively simple task, but in the first few months, working out people’s individual entitlements is a genuinely significant task.
For that reason, we are currently working with the private sector—Mercer Human Resource Consulting, which is one of the leading providers of services to the pensions industry—on our processes and on the data issues that we have encountered. Mercer is working to transfer its expertise and to build on the knowledge already acquired by the staff at the FAS unit.
I have also written to key figures in the pensions industry, urging them to support the members in the schemes for which they are responsible and to supply FAS with the data that we need to make payments. We have urged the pensions industry and its administrators to provide the data that we need. We are also working with the pensions service to complete the transfer of the FAS operational unit as quickly as possible.
FAS staff have already successfully handled the challenges of scheme notification and qualification—the process of working out which schemes will be eligible. They have dealt with applications from more than 900 pension schemes and, since we announced the review of the FAS in June, its staff have overseen a 10-fold increase in the number of payments being made. I do not believe that it would be an effective use of taxpayers’ money formally to review the operation of the FAS again. That would prove a distraction to the staff and to scheme trustees and administrators, who are now working closely together to get those data. I want to thank the trustees who have been providing information and making requests for initial payments and, indeed, the FAS staff, who have been working extremely hard and effectively to increase the number of payments.
Now, the amendment also calls for a review of FAS funding. In the White Paper in May we announced an increase in FAS funding from the £400 million originally allocated to £2.3 billion. In response to the hon. Gentleman’s inquiry, we set out the forecasts on the basis of which we arrived at the £2.3 billion, based on a review of the people and schemes. We set that out in some detail to Parliament. I am happy to discuss that with him again, if he wants. The key point is that the amount that we will pay to people in a situation is clear; we have committed £2.3 billion, which, we believe, cover our future liabilities under the financial assistance scheme. As I said, and as I think the hon. Gentleman agrees, there is a balance to be struck between the real need of people in this situation and what the taxpayer should be expected to fund. We did and do recognise the real losses that people have had. That is exactly why we have extended the scheme to those within 15 years of normal retirement age.
 The hon. Member for Eastbourne pressed me to say whether we had looked at other sources of funds. We have. His amendment proposes looking at unclaimed assets, which continue to be seen by the Opposition as a panacea. The challenge for them is that the Government will be committing, on behalf of the taxpayer, to guarantee pensions for the lifetime of the scheme, with survivors’ rights. That would be for at least 50 years. I do not think that it would be responsible to provide such a guarantee without having identified the resources needed to underwrite it over the long term or, indeed, to establish the amount available as unclaimed assets and then represent that amount as an ongoing income stream.
 The hon. Member for Eastbourne cannot be sure that unclaimed assets would provide an income stream over 50 years. It is also clear that there is not enough in unclaimed assets to be able to pay pensions in full, even if he thought that that stream was one that could be reliably depended on for the next 50 years. That is the problem with relying on unclaimed assets. It is the same problem as thinking that we could pay from the national insurance fund surplus or the Department’s contingency reserve. They are not pots of money that can be used to make that guarantee over 50 years and it is not fair to pretend to people that that could be the case.

Andrew Selous: Is it the Minister’s argument that because unclaimed assets are not a total solution, they are no solution at all?

James Purnell: No, that is not my argument. My argument is that if people are to make a guarantee over 50 years, they need to say how it will be funded. It is also worth saying that unclaimed assets are not Government money. As the hon. Gentleman knows, an independent commission—the Commission on Unclaimed Assets—has been set up to propose recommendations on the use of unclaimed assets in the UK. The commission recommended the creation of a new independent financial institution to drive voluntary and community organisations seeking to relieve poverty in the UK. The commission’s final report to be published before the 2007 Budget will detail a series of technical and regulatory mechanisms to ensure a thorough auditing of dormant accounts and a rigorous campaign to unite account holders with their unclaimed assets. Obviously, if that is successful, there will not be as much money in that fund.
The commission has made clear what the fund should be used for. If the hon. Gentleman is saying that the money should be taken out of that fund and that he disagrees with the proposal, that is his right. However, the point is the same for any use of Government money. For example, if the Government were to use taxpayers’ money to increase the amount in the FAS, that money would not then be available for an alternative use. Decisions should be looked at in that context.

Andrew Selous: The point made by the Minister is, of course, valid. Some money may be reunited with it owners—that is fine and we accept that. However, is he really saying that, as the Minister for Pensions, he is happy for that money to go towards the purposes of a social investment bank and reducing poverty? That is an objective that all hon. Members would share, but, as the Minister for Pensions Reform, does he really think that that should be the first call on that money?

James Purnell: My job as the Minister for Pensions Reform is to try to get more money for this scheme and that is exactly what we did in the White Paper; we extended the money available to £2.3 billion. We clearly recognise the loss that people have suffered and we found extra taxpayers’ money to extend the scheme to people within 15 years of their normal retirement age. I have made clear, as has my right hon. Friend the Secretary of State, our commitment to helping people who have suffered those losses.
The other source of funding mentioned by the hon. Gentleman was bulk annuity. He knows that the FAS tops up an annuity purchased by the scheme’s trustees on the member’s behalf. In concluding that that represented the best use of taxpayers’ money, we considered whether pooling the remaining assets was a viable option. The difficulty was that around 110 of the 640 schemes that qualify for the FAS have already completed winding up and have purchased annuities. For the rest, it is not known what proportion of assets are still being held, but a significant proportion will already have been spent on annuities for pensioners, therefore significantly reducing the bulk purchasing power of the remainder. As the hon. Gentleman knows, if we do not annuitise, that changes the risk profile of people in the future and potentially leads to pensioners’ incomes going down while in payment, which, again, may be something that people are reluctant to expose themselves to.

Nigel Waterson: Can the Minister give us some idea of what data are or could be available on which pension funds still have assets that have not been devoted to purchasing annuities? That is a crucial issue, but it seems quite difficult to get a handle on the figure.

James Purnell: I thought that I had just given it to him by saying that 110—in fact it is 111—of the 640 schemes that have qualified for FAS have already completed winding up and have purchased annuities.
So, in December, the hon. Member for Eastbourne remarked that the review of FAS was
“pithy and to the point.” —[Official Report, 10 th  Delegated Legislation Committee, 6 December 2006; c. 7.]
We are implementing the review’s findings and have considered other sources of finance, but we think that in making guarantees to people over the next 50 years, we have to know where the money will come from and be able to identify it reliably. We completely share the Committee’s sympathy for people who have lost pensions. I have met more than 100 people in that situation and, of course, it is heartbreaking to have had an expectation that has not materialised. That was exactly why the Government believed it right to provide extra support through the financial assistance scheme and to introduce the pensions regulator and the Pension Protection Fund. However, we must balance that obligation with our obligation to taxpayers, many of whom do not benefit from defined benefit pension schemes at all. We have great respect for the office of the ombudsman and the motives of those who are fighting to represent people, but both the ombudsman and the Select Committee recognised in their reports that the Government did not cause the pension schemes to fail. It would not therefore be right to write a blank cheque to underwrite the losses. I hope that I have explained why it was right to extend the FAS, but it would not be fair to the taxpayer to underwrite schemes in full.

Nigel Waterson: I am grateful to the Minister for at least parts of his answer and for taking us through some of the practical difficulties, but I wonder whether the matter could be re-examined. I appreciate the Minister’s point about transferring to the PPF being somewhat troublesome when it had only just started, but now that it is more established I wonder whether that could be reconsidered. I was interested to hear about the work being done with Mercer, which will hopefully bear fruit.
The Minister spoiled it all by saying, among other things, that the Government would not write a blank cheque. Nobody is asking them to do that. We are saying to them that they should stop telling us what the problems are and consider more seriously the options that have been put forward. They have committed £2.3 billion, but it is still unclear to me whether there is an open-ended commitment beyond that figure. We agree about the extra burden on the taxpayer, which is precisely why we keep mentioning other possibilities.
On unclaimed assets, we have always said that the obvious safeguards must be in place, including major attempts to reunite people with their assets, as happened in Ireland, and an underlying guarantee that late applicants with a legitimate claim can be compensated. There is a big difference between the bank accounts in question in this country and, for instance, those in Ireland, where a lot of them go back a long way—sometimes hundreds of years. The chances of anyone coming forward are therefore much slimmer, although it is not impossible. The Minister could have been a bit more open about how far the process of identifying unclaimed assets and bank accounts has gone in organisations such as the British Bankers’ Association, and how far the process of identifying the £3 billion of unclaimed pensions has gone at the NAPF. It happily confirmed that figure to us recently.
I suppose it comes down to whether the Minister is happier for money to be spent on shoring up the Olympics than on pensioners who have in many cases lost almost everything. I shall not press the new clause to a Division, but I will certainly wish to return to the matter on Report. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 7

Compliance with recommendations of the Parliamentary Ombudsman
‘The Secretary of State shall, within three months of this Act coming into force, report to both Houses of Parliament on how he proposes to comply fully with the recommendations contained in the Parliamentary Ombudsman’s 6th Report of Session 2005-06, “Trusting in the pensions promise: government bodies and the security of final salary occupational pensions” (HC984).’.—[Mr. Waterson.]

Brought up, and read the First time.

Nigel Waterson: I beg to move, That the clause be read a Second time.
The new clause is on another big issue, which has been a running sore for some time and a major distraction from the Government’s attempts to restore confidence in the pensions system. It would require the Secretary of State, within three months of the Bill coming into force, to bring forward proposals to comply fully with the recommendations in the ombudsman’s sixth report of 2005-06, “Trusting in the pensions promise: government bodies and the security of final salary occupational pensions”.
One might think it a bit odd that it has been necessary to table such a new clause. After all, the office of the parliamentary ombudsman has existed since the 1960s. It was introduced by a Labour Government, in the shape of Dick Crossman, and it has had cross-party support ever since. It is seen as an important, independent safeguard for the rights of individuals when the Executive bring about maladministration. In her report in March 2006, the ombudsman could not have been clearer. She found that the Government were guilty of maladministration to pension scheme members who lost their money when their schemes collapsed or were closed by their employers. She said that official information about security of final salary occupational schemes
“was sometimes inaccurate, often incomplete, largely inconsistent and therefore potentially misleading”.
However, what did the Government do? First, they rubbished those findings, and then they rejected them in total, mainly by claiming that the cost of providing financial redress, as indicated by the ombudsman, would be too great.
The Prime Minister came up with a figure of £15 billion—he has repeated it more than once since then—and said that that was unaffordable. Since then, the Government have been in denial about the whole matter. The Prime Minister said that
“although of course we must and do treat seriously the ombudsman's findings, we are being asked as a consequence of them to give, on behalf of general taxpayers £15 billion-worth of commitment. We simply cannot do that.”—[Official Report, 15 March 2006; Vol. 443, c. 1450.]
The first major issue—I shall come to financial redress in more detail—is that it is not the job of Ministers and certainly not the job of the Prime Minister, to decide whether there has been maladministration. That has been found, and the message to Ministers is to get over it. The ombudsman made her decision and the whole point of creating the Parliamentary Commissioner for Administration in 1967 was that such decisions were taken away from the Executive. Challenging the findings of the referee, which is effectively what the Government have done, is simply unacceptable and a constitutional outrage, leaving aside the continuing and abiding unfairness to those who have lost out.

Andrew Selous: Has my hon. Friend noted that a majority of Members of Parliament have signed a collection of early-day motions asking the Government to accept the ombudsman’s findings?

Nigel Waterson: I think my hon. Friend is right, and that is another worry. Hon. Members on both sides of the House who may have no direct expertise or interest in the pensions issue are appalled that the Government have seen fit simply to rubbish and reject the ombudsman’s findings. There have even been dark briefings from unknown sources in the Government about the future of the Parliamentary Commissioner for Administration. That in itself is an outrage.
The Government have misrepresented the real cost in net present value terms of providing financial redress. A more reliable calculation produces figures between £2.9 billion and £3.7 billion. A figure between £13 billion and £17 billion, which coincidentally happens to be bang on the money as far as the Prime Minister’s figure is concerned, represents a cash figure.

Adrian Bailey: Returning to the hon. Gentleman’s previous argument, which I followed closely, like all hon. Members my casework has included a number of applications to ombudsman on a range of public service issues. The consistent theme in decisions is that there must be a link—causality—between maladministration and an injustice to an individual. It is odd that the ombudsman’s report and the words that the hon. Gentleman quoted said that the Government’s leaflets were potentially misleading. That does not make the link.
Going back even further, many people who would qualify for compensation under the ombudsman’s ruling took out their schemes before any Government leaflets were published. I do not see how any link can be made between their injustice and Government action. Will the hon. Gentleman comment on that?

Nigel Waterson: That is the hon. Gentleman’s point of view, and I am sure that it is honestly and genuinely held. However, with all due respect, it is irrelevant.

Adrian Bailey: No, it is not.

Nigel Waterson: I am pleased to put the hon. Gentleman in this august company, but that view is as irrelevant as the view of the Minister, the Secretary of State and the Prime Minister. All those views, of right hon. and hon. Members in all parts of the House, are beside the point. That is why we have a parliamentary ombudsman, who is given the role to step outside the ambit of the Executive and take a view, and like it or not she has found maladministration and casualty.
The hon. Gentleman tempts me to go into the findings of the ombudsman’s report, “Trusting in the pensions promise”, in more detail than I had intended. She found a series of instances of maladministration. She talked about leaflets, ministerial press notices and various ministerial statements in the House. In particular, she refers on page 150 of her report to
“three discretionary or policy decisions taken by public bodies in relation to the MFR”—
the minimum funding requirement that was set up under the 1995 legislation. She referred, first, to
“the decision to change the MFR basis in June 1998 by amending the equity market value adjustment”,
secondly to
“the decision...in March 2001, not to make new disclosure to scheme members (as it was claimed had been recommended by the actuarial profession) of the risks to their pensions and to explain the degree of security afforded by being funded to the MFR level”,
and thirdly to
“the decision in March 2002 to change the MFR basis by making a further change to the equity market value adjustment.”
If I remember her right, the ombudsman found that there had been clear maladministration in two out of the three cases. She said in terms:
“I consider that anyone reading or hearing the Ministerial statements about the MFR and the purpose behind this statutory mechanism would have reasonably believed that a scheme funded to the MFR level would have enough assets to pay the pensions already in payment and to provide a cash transfer value of the accrued pension rights of non-pensioners, regardless of what happened to the employer.”
I have already quoted the passage about misleading statements, but she continued:
“Furthermore, during the operation of the MFR, official statements about the security provided by a scheme...continued to be vague, incomplete or misleading.”

Andrew Selous: Although my hon. Friend and I both want a more generous settlement to the problem, is it not the case that, were the Government to accept the ombudsman’s findings, they would not be financially bound to pay in £2 billion or £3 billion, or any other amount? That point should be made to the Government as well, should it not?

Nigel Waterson: I am grateful to the hon. Friend. I do not think that the ombudsman is unduly prescriptive about how the calculation should be approached, which is rightly a matter for the Government. I do not want to quote the report in any more considerable detail, but it is worth pointing out that the three major instances that I have related all happened on this Government’s watch, and that in two cases there was significant weakening of the security provided under the MFR. In any event, the ombudsman has found clear maladministration. To repeat the quotation that I used in the previous debate, she said:
“I am quite clear that the FAS will not constitute an adequate and appropriate remedy for the injustice claimed by those who have complained to me”

James Purnell: Does the hon. Gentleman recognise that all that was being done in those adjustments was carrying out what we were required to do under the Pensions Act 1995, which was to reset the MFR to the level at which it had been originally set? We had to follow actuarial advice when we did that. The MFR is what was replaced in the Pensions Act 2004 by going to a scheme-specific requirement. All that was being done in those instances was operating the MFR as it was put forward in the 1995 Act.

Nigel Waterson: If the Minister is saying that Ministers had no option or choice, I do not accept that for a moment. In one of those instances, as the ombudsman makes plain in her report, Ministers took a decision that flew in the face of the advice that they had received from the actuarial profession.

James Purnell: I shall correct this if my memory is wrong, but I do not think that that is right. We consulted on it and the response was that it was worth making those changes only if the MFR was going to be there for the long term. However, the Government were already planning to replace it with a different regime. The hon. Gentleman needs to be slightly careful about what allegation he is making. The MFR was not weakened, but restored to its original intended level.

Nigel Waterson: We may be getting into semantics. The effect was to weaken the protection. I am not making a case here; I am simply trying to reflect what is in the ombudsman’s long and thorough report. If the Minister wishes to clarify these issues in writing, I am happy to read what he has to say.
Let me help the Minister; this is a perfect moment for him to have intervened. At page 169, paragraph 5.213, the ombudsman says:
“In October 1998, briefing by officials in DWP’s predecessor department had recognised that the decision in the 1997 Budget to abolish the system of tax credits given to pension schemes had ‘shaken’ pension scheme funding. In November 1999, DSS officials told a Minister that that decision had ‘had the effect of weakening the MFR test as prescribed at that time’.”
So the Minister may wish to reconsider what he said in his intervention.
I return to quote that I was about to give, which relates to the intervention of the hon. Member for West Bromwich, West. The ombudsman went on to say:
“I consider that it is evident that this decision had the effect of reducing the income available to all pension schemes every year.”
She added that that decision
“weakened the protection offered to scheme members by the MFR.”
I stress again to the Minister that I am simply trying to summarise, as briefly as I can, the key findings in the ombudsman’s report. In her recommendations, she says that
 “the Government should consider whether it should make arrangements for the restoration of the core pension and non-core benefits promised to all those whom I have identified above...including if necessary by payment from public funds, to replace the full amount lost by those individuals.”
There is quite a lot of scope there to decide how one calculates the full amount lost by those individuals as set out in her recommendations.

James Purnell: I shall correct this if I am wrong, but I think that the point that the ombudsman was making was that the MFR was weakened by the changes because stock market growth was affected, and that changes therefore needed to be made. We made those changes. I think that we implemented the 1998 recommendations.

Nigel Waterson: It is perfectly possible, at this stage in our debates, that the Minister and I are talking at cross-purposes. I thought that the paragraph that I quoted a moment ago was clear enough to the extent that it suggested that officials had warned the Minister’s predecessor and that that advice was not taken. However, these are important issues and it is important that we are accurate about them, so I am more than happy to be corrected, just as the Minister has generously said that he is happy to be, in subsequent correspondence or, indeed, at the beginning of the next sitting.
As is well known, the ombudsman went on to recommend that
“the Government should consider whether it should provide for the payment of consolatory payments to those scheme members fully covered by my recommendations - as a tangible recognition of the outrage, distress, inconvenience and uncertainty that they have endured.”
That is not the strongest recommendation. It says that the Government should consider doing that, but did they consider it? Not for a moment: they dismissed the report out of hand. They rubbished it, tried to undermine the ombudsman, as they have since done, and would have nothing to do with considering her recommendations.
In the next paragraph, the ombudsman says that
“the Government should consider whether it should apologise to scheme trustees for the effects on them of the maladministration I have identified, particularly for the distress that they have suffered due to the events relevant to this investigation.”
There is no sign of an apology, Mr. Taylor. Apologies, as my dear sainted mother used to say, do not cost anything, but the Government could not bring themselves even to apologise. The ombudsman went on to make other related recommendations.
That is the approach taken in the ombudsman’s report. It is still an impressive report that has been dismissed out of hand by the Government. What happened next? Once the five recommendations had been rejected altogether and the cost of meeting them had been substantially exaggerated, the Select Committee on Public Administration, to its eternal glory, decided to take on the matter, too. It carried out its own investigation and produced a report in due course, with the rather worrying title of “The Ombudsman in Question: the Ombudsman’s report on pensions and its constitutional implications”.
 Let me give some of the Committee’s choicer comments on the Government’s conduct. On page 11, paragraph 21 states:
“We have made our own investigations. We believe the Government is being, at best, naÃ¯ve, and, at worst, misleading.”
The Committee also states on page 32:
“We share the Ombudsman’s concern that the Government has been far too ready to dismiss her findings of maladministration. Our investigations have shown that these findings were sound. It would be extremely damaging”—
extremely damaging—
“if Government became accustomed simply to reject findings of maladministration, especially if an investigation by this Committee proved there was indeed a case to answer. It would raise fundamental constitutional issues about the position of the Ombudsman and the relationship between Parliament and the Executive...We trust that this Report will act as a warning to the Government.”
Well, not a bit of it. We had a debate, quite properly, on the Committee’s report and Ministers continued to take the attitude that they have taken all along—they are unwilling even to consider following the recommendations of the ombudsman.
A quotation that is always particularly poignant on such occasions comes from the then Secretary of State for Social Security, speaking in a different context, in 2000. He said:
“The giving of wrong information by a Department is inexcusable. There is a clear responsibility to ensure that the information that Departments provide is accurate and complete. In this case, it was not...As a matter of principle, we believe that when someone loses out because they were given the wrong information by a Department, they are entitled to redress.”—[Official Report, 15 March 2000; Vol. 346, c. 307-308.]
Where are we now with that unhappy band of people, already facing penury, who have been unable to persuade the Government to accept the findings of the parliamentary ombudsman? We have heard that they are going to the High Court tomorrow for the beginning of a court case, where the Government apparently have every intention of recovering their pound of flesh in recoverable costs should those people happen to lose. Only the other day, we had the European Court of Justice case brought by former employees of Allied Steel and Wire—I am pleased to say that that case was funded by at least one major trade union—

James Purnell: Just to be clear, the point is that the Department does not waive its costs in advance. If we established a practice of doing that, it would apply to most people who ever sue the Department. Principles are established for public interest cases according to the Corner House principles, and it is common ground that the case does not meet those principles. We will of course consider the issue of costs at the end of the proceedings, which is our normal practice in all sorts of similar cases.

Nigel Waterson: I am aware that there are precedents on the issue of public interest cases and the recoverability of costs, although I would have thought that if ever there was a case with a clear public interest it would be this one. I do not want to read too much into it for the sake of the people on whose behalf I am essentially speaking, but I hope that what the Minister said will leave the door slightly ajar on the vexed issue of costs.

Andrew Selous: Does my hon. Friend agree with me that it is worth putting on the record, for those who may not understand these things, that there is a majority of Labour Members on the Public Administration Committee, albeit without a Labour Whip?

Nigel Waterson: That is clearly where they went wrong. I am grateful to my hon. Friend for that intervention. In fairness, this is not just a Conservative-Labour issue in the House; many Labour Members are at least queasy—I put it no higher than that—about the Government’s attitude to the ombudsman’s report. Tomorrow it might not be pensions; it might be one of their constituents and another issue of maladministration or another Government Department refusing to accept the findings of the ombudsman. That is the worry.
 Let us take the debate away from pensions for a second. When all other avenues have failed, it is the right and duty of every right hon. and hon. Member to refer cases on behalf of their constituents to the ombudsman and to rely on her independence and the persuasiveness of her findings. The ombudsman has few, if any, real powers, but if the Government are going to get into the habit of dismissing her findings out of hand, what sort of injustices could go on not being dealt with by the system that has been in place for 40 years?
I was talking about the European Court of Justice case brought by former employees of Allied Steel and Wire. As a former litigator, I am not unused to the syndrome of both sides claiming victory, which certainly happened in that case. Mr. Derek Simpson, general secretary of the Amicus union, claimed that the ruling was a victory. He said:
“This judgment vindicates our decision to take this case all the way to the ECJ.”
I understand that the case will now be referred back to the High Court. The Government suggested that it was a victory for the Government, but that is beside the point. Why should groups of people who are already suffering hardship be forced to trail over to the European Court of Justice or up the road to the High Court in London to try to get what, according to the ombudsman, is their due in any event?
I want to return to a central point that was at issue in the last debate: confidence in the pensions system. If the Government are going to behave so shabbily they will have only themselves to blame if the system of personal accounts in this and the next Bill does not succeed. There are a lot of angry people out there who have suffered very badly as a result of the maladministration. What should the Government do?

Angela Smith: Is not the real anger of people out there who have lost their pensions directed against the employers who put them in the position of losing their occupational pensions in the first place?

Nigel Waterson: I do not agree with that as a blanket statement from the hon. Lady. There are cases in which employers have been rash, to put it no higher, in the way they have conducted themselves, but some of the senior management of companies such as Turner and Newell—I met people from that company the other day—are in exactly the same boat as other employees.  In fact, they are in a worse boat because they will be unduly penalised even though they may come under the PPF because of the cap on compensation. The hon. Lady is partly right; my experience is that one has to look at the matter on a case-by-case basis. I do not totally disagree with her.
What should the Government be doing? As I said on 7 December when we debated the issue, they should stop mucking about and begin by accepting that there has been maladministration, instead of second-guessing the ombudsman. That is clear.
Secondly, they should apologise. As I said then, if it helps them to steal themselves to do that, we as Conservatives will accept our modest share of the blame arising from our stewardship from 1996 to 1997, as set out in the ombudsman’s report.
Thirdly, the Government should stop floating ridiculously inflated figures like £15 billion as the cost of tackling the issue. Again, echoing the last debate, they should start doing some serious work to calculate how they can best use the available assets and other resources to help those people. We dealt with purchasing bulk annuities. The Minister was good enough to give us the number of schemes, but it would also be worth knowing the actual amounts available from those that have not finished winding up. Perhaps he will write to me if the figure is not readily available. It would be relevant.
There is the purchasing of bulk annuities, the pooling of assets remaining in any of the failed funds, giving proper credit for benefit payments saved—we often lose sight of that—and of any income from tax. Deemed buyback might not help everybody, but for some people it could be a major solution.
We should have the aspiration of giving those people something like compensation at about the level available under the PPF, if at all possible. We talked about unclaimed assets—I shall not go over that ground again. The Government should stop sticking their head in the sand, and start using the resources that are available to them—not to Opposition parties—to start coming up with a sensible solution to the problem.
I return to the central issue. No, there are two central issues. Actually, there are three. I am sorry, I am beginning to sound like Monty Python. The first, of course, is fairness—I would have thought that that went without saying—and I have tried to deal with that. There is the constitutional issue, which will not go away, whatever we decide about pensions and this specific issue. Finally, there is the issue that is fundamental to this and any future legislation: confidence. How can we rebuild confidence in the pensions system as a whole? It is no good telling people, “Of course, that is the old system, but this is the new system of personal accounts.” The man in the saloon bar is not interested in any of that. All that he will see again and again, including tomorrow, is a lot of disgruntled people on the television who have lost their pensions, and a Government who apparently are impervious to doing anything about it.

David Laws: We have debated this issue on several other occasions. The hon. Gentleman set out the case for the prosecution, as it were, extremely effectively, so I shall not deal with the issues that he aired in his contribution.
There is a sense of anger and injustice that the ombudsman’s report has been ignored. That was behind the cross-party consensus in the Public Administration Committee report that the hon. Gentleman discussed. He did not mention the early-day motion that came out of that report. It has now been signed by more than 250 Members of Parliament, including 119 Members from the Government Benches. And, within the past week, there has been a ruling from the European Court of Justice.
I support the points made by the hon. Member for Eastbourne. In addition, I wish to make just two appeals to the Minister. The first is the one that I made to the Secretary of State yesterday about what will happen if the judicial review in the next couple of months goes against the Government. May we have a clear undertaking that if the judicial review concludes that the Government have acted unlawfully in ignoring the ombudsman’s findings, the Government will finally accept that they have lost the argument and that it is time to come forward with a proper compensation package? Will the Minister assure us that we will not then go even further through the processes of appeal, in which the Government simply try to delay and find every opportunity to avoid paying the compensation that most believe is justified?
Secondly, I should like to return to the issue raised by the hon. Member for Eastbourne about legal costs. I understand all the stuff about precedents, but we are talking about an extraordinary case. There has been an incredibly strong report from the ombudsman, making recommendations that compensation should be paid and that there has been maladministration. There has also been the recent case at the European Court of Justice. There is clearly a strong case to answer. Who are the people pursuing it? They have lost their pensions and will fear bankruptcy if they end up having to pay the Government’s costs as well. On top of all their other problems, they run the risk of losing their properties. In some cases, they have even at times considered whether to continue to pursue the case because of their fear that the Government will come back to them for their costs afterwards.
Surely in circumstances as exceptional as those, in which there is such a strong and legitimate case to challenge the issue in the courts, it is genuinely grossly unreasonable, unfair and bullying of the Government to continue to hold out the possibility that they might pursue their own costs against those individuals. If the only thing that we get out of the Minister today and the demonstration tomorrow is an indication that the Government will withdraw that threat, that would be welcome indeed.

James Purnell: I made the position on that last point clear in my intervention on the hon. Member for Eastbourne. There are well established legal precedents and if we created a new precedent, it could well apply to a very large proportion of the cases taken out against my Department and others. I said clearly that we would consider the position at the end of the case, and that is exactly what we do in lots of similar cases in which people have similar issues about the means available to them. Our point has always been that we will act in accordance with the precedents that apply across the Government.
 I want to try to answer as many points as possible. The hon. Member for Eastbourne made a point about the minimum funding requirement. The Pensions Act 1995 set down the minimum funding requirement and a range of ways in which that would be calculated. When those assumptions changed, it had to be recalibrated back to its original intended level. In 1998, the actuarial profession recommended changes that brought the MFR down to its original level; I think that the hon. Gentleman was referring to that decision. Those changes were agreed by the Government in June 1998. The ombudsman found that no maladministration was involved in the particular decision to which the hon. Gentleman referred. I hope that that clarifies his point.
Both Opposition spokesmen touched on the case at the European Court of Justice. To recap, the Court gave its ruling on 25 January. We are studying the judgment carefully and will, of course, abide by our legal obligations under it. There is a limit to what I can say about the case because it is returning to the UK High Court so that rulings can be made in the light of what the ECJ has said.
However, I can make a couple of points about the judgment. First, the ECJ considered whether UK legislation in place before the Pensions Act 2004 sufficiently implemented article 8 of the 1980 European insolvency directive. Successive Governments had always taken the view that the directive does not oblige member states to ensure that pension promises are guaranteed in full when a company becomes insolvent, or require the taxpayer to underwrite them, and the Court has clearly supported that view.
On the question of damages, the Court appears to have given a clear steer that damages may not be payable, but that is a matter for the High Court to decide and therefore it would not be appropriate to comment further on that aspect of the case. It is worth noting that what the European Court of Justice has said is similar to the point that we have always made on this matter. The SERPS scheme referred to in a quote from a previous Secretary of State cited by the hon. Member for Eastbourne is a scheme run by the Government, who are responsible for its administration and the information about it. There is a difference between that, where the Government are clearly responsible, and private schemes, which are provided by employers and governed by trustees. That is a significant difference.
We genuinely recognise the bitter blow that losing a pension is to anyone in that situation, which is exactly why we have put in place the financial assistance scheme. The only point that we have made throughout the process is that we need to strike a balance between the losses that people have suffered and the amount that the taxpayer should be expected to pay.

David Laws: The Minister would accept that on a financial assistance scheme there are some individuals who will get no compensation at all. Following the ECJ judgment, can that be compatible with European law?

James Purnell: There is a limit on what I can say while the case is going through the court. Of course, we shall look at what the High Court says and act in the light of it, but the hon. Gentleman will understand that, given that there is a court case going on relating to this matter, it is hard for me to comment without straying into legal territory.
As I tried to say in my opening remarks, it is worth noting that the Court reviewed the previous regime and the previous FAS scheme. The Court did not take a view on the FAS scheme as extended, to £2.3 billion. I do not think that the hon. Gentleman is a lawyer—I am certainly not one—and we should not pre-judge what the High Court decides.

Andrew Selous: On a point of order, Mr. Taylor. I wonder whether I might draw the Minister’s attention to the assurance that he gave the Committee, in column 28 of the Official Report of the Committee’s proceedings on 23 January, that he would ask his officials to prepare a note on potential costings for new clause 12, which we shall come to on Thursday morning. I have not yet had that note, and I think it reasonable to expect it by close of play tomorrow.

David Taylor: That is not a point of order, but the hon. Gentleman has put the point on the record and the Minister may respond to it.

James Purnell: We are happy to give the hon. Gentleman that assurance.

David Laws: Further to that point of order, Mr. Taylor. I am grateful to the Minister for his response, and I confirm that I am not a lawyer, but one does not have to be a lawyer to understand that if individuals were getting zero compensation, under the old or new scheme, they cannot possibly be in an environment where there is pension protection compatible with Community law, as the ECJ judgment made clear.

James Purnell: The Pension Protection Fund does give people that coverage and the issues of FAS and what happened in the past are exactly what will be considered by the High Court. The hon. Gentleman must know that I cannot comment on that in this setting, given that the matter is going back to the High Court. Neither he nor I are lawyers and it would, therefore, be inappropriate to discuss it. Even if we were, it would still not be appropriate.
As I say, we shall give careful consideration to the possible implications of the European Court’s ruling for the financial assistance scheme and the Pension Protection Fund, and we will need to take into account the fact that those matters have not yet been decided by the High Court in this country. In response to the point about the judicial review, we shall of course abide by any legal requirements that are put on us by that case. It would be extraordinary if the Government did not do so. I hope that that is the assurance that the hon. Gentleman was looking for, and it is the same as the assurance that the Secretary of State gave him yesterday.

David Laws: I appreciate that the Minister is not a lawyer. Will he confirm whether the Government have a right of appeal if the judicial review finds against them, or would they at that point simply settle and accept the decision of the judicial review?

James Purnell: I think that there are appeal rights, but I cannot give the hon. Gentleman a hypothetical answer about the outcome of the case. We will abide by our obligations; that is the most that I can say to him.
 We appreciate the hon. Gentleman’s reason for tabling the amendment. In June last year, we placed before Parliament a detailed response to the ombudsman’s report. In November, we published our response to the report of the Public Administration Committee. The key issue is compliance with the ombudsman’s recommendations, which I shall discuss.
 As the hon. Member for Eastbourne said, the ombudsman said that she did not intend to require the Government to replace all lost pensions, but that the Government should consider whether to make arrangements to restore those pensions. That is precisely what we have done. As we have already reported to Parliament, the Government carefully considered the ombudsman’s report. Although we did not accept the findings, we extended the financial assistance scheme by more than £2 billion.
I think that the hon. Gentleman’s intention with this amendment is to require the Government to replace the lost benefits in full. We said in the previous debate—[Interruption.] Well, if that is not what he intends, I have genuinely misunderstood him and I am happy to stand corrected.
In the debates to which the hon. Gentleman referred, we explained in considerable detail why we do not believe that replacing those pension losses in full is justifiable. I do not propose to go through those points in detail, but it is worth going over the principal ones. I think that all members of the Committee would understand someone feeling frustration and anger at the provision that they had made having been lost. The taxpayer would be responsible for replacing the losses only if it were clear that the Government were responsible for them, however. I do not think that that is the case; the pension schemes were provided not by the state, but by employers. The trustees were not appointed by the Government; the contributions and the benefits of the schemes were not the Government’s contributions and benefits. It was the responsibility of the trustees, the employers and their financial advisers to ensure that the pensions were properly funded. The vast majority of the schemes concerned did not meet the minimum funding requirement that was stipulated by the Pensions Act 1995.
 The ombudsman acknowledged that the losses were caused by a number of factors. Of those, the most immediate in most cases was employer bankruptcy, which triggered the scheme wind-up. Due to the sustained downturn in world stock markets, the wind-up occurred at a time when the scheme assets were less valuable. The hon. Member for South-West Bedfordshire is shaking his head. Does he wish to intervene?

Andrew Selous: Subject to being in order, Mr. Taylor, the Minister talks about the decline in world stock markets, but there is the issue of the effect on stock markets of the Chancellor’s raid on the dividend tax credit.

David Taylor: Order. Will the Minister confine his comments to the new clause?

James Purnell: I will follow your ruling, Mr. Taylor. There were other factors, such as the investment strategies of the individual schemes, the increase in longevity and the cost of the annuities. The Committee will recognise that both the ombudsman and the Public Administration Committee made it clear that they did not think that the Government had caused the schemes to fail. The issue was therefore what assistance was justified.
In her report, the ombudsman appears to have gone beyond her normal approach to replacing losses. Her normal response was to put a person in the situation in which they would have been if the alleged maladministration had not occurred. It is unrealistic to say that all 125,00 people covered by the ombudsman’s report would have been able to protect each and every aspect of their promised pension if only leaflets had been differently worded. The actions available to individuals were limited and, in some cases, would have exposed them to greater risk. In practice, the only option available to most members would have been to take a transfer value of their accrued rights and put that cash into a personal pension. If the scheme were already in financial difficulties, that might well have reduced the value of the transfer on offer. Secondly, transferring to a personal pension would have meant that the individual had to pay management costs and would probably have lost the employer’s contribution to his pension. Finally, the fund would have been exposed to the stock market at a time when there was a downturn in the stock market.
The fundamental point remains the one that my hon. Friend the Member for Sheffield, Hillsborough made. The schemes were under-funded, and promises had been made to individuals that were not met by the contribution levels that had been required by the schemes. Nothing that was said in leaflets changed that. Indeed, the vast majority of people who are affected joined before any leaflet was published or, indeed, the 1995 Act came into effect.
We accept that we have a responsibility to assist people. That is why we introduced the FAS. However, we do not think that we should underwrite those obligations in full. That would effectively be to underwrite the promises that were previously made by employers but which were not sufficiently funded. Apart from the issue of principle, it would also require a significant commitment of taxpayers’ money over a long time—some £15 billion over 60 years. That is the same figure as the £2.9 billion to £3.7 billion in net present value; those are just different ways of presenting the same figure, one taking into account a discount rate and the other presenting it in cash terms over a number of years, which is exactly how the Government account for money at Budget time or in the comprehensive spending review. We gave both those figures in our response to the ombudsman.
To give an idea of how much money that is, it is the same as employing an extra 6,000 teachers, 8,000 nurses or 3,000 doctors over those 60 years; it is a very significant sum. Even going to the level of PPF benefits, which the hon. Member for Eastbourne mentioned, would involve a significant increase in the amount committed.
I hope that I have explained why the Government felt it right to extend the FAS, and why we do not think that it would be right to underwrite the schemes in full. They were private schemes provided by employers and governed by trustees. Had we not published any of those leaflets, people would not have benefited from the pensions that they were hoping for because the fundamental problem was that their schemes were not being funded properly to achieve that. I hope that that gives the Committee the information that it needs, and I urge the hon. Gentleman to withdraw his amendment.

Nigel Waterson: I do not really wish to go back over all the points that I made earlier about how the package could be calculated or paid for, but it is deeply depressing that the Minister is consistently parroting the Government line that it is all far too difficult, so we are not even going to go there. It is worth reminding him that new clause 7 simply requires the Secretary of State to tell us, within three months of the coming into force of the Act, how he proposes to comply with the recommendations. That gives him a certain amount of flexibility, but apparently even that is not acceptable.
 I am afraid that the Minister is again trying to second-guess the ombudsman. It is not his job to say whether there has been maladministration and to query the methodology of the ombudsman. That way, disaster lies. If any of us has a constituent who has had some massive unfairness wreaked upon him and refers the case to the ombudsman, I wish him luck if he is up against one of the Departments of the current Government. The Minister did not really touch on the constitutional issue, so let me give him a chance to do that.

James Purnell: The hon. Gentleman is right. I do want to return to that, and to make it clear that this is the first time that my Department, or any of its predecessors, has ever rejected an ombudsman’s case. We have made it clear that we have great respect for her office, and there is no question of it becoming a habit. They are exceptional circumstances.

Nigel Waterson: I presume the reason why the circumstances are exceptional is because a lot of money is involved. I cannot see any other justification. Anyway, I do not want to labour the point.
Again, however, it is interesting that the Minister accepted that he would have to comply—no doubt, with no great enthusiasm—with the findings of the High Court, or of the Court of Appeal or of the House of Lords in due course, if the case were to go that far. It was very big of him to do so. The only reason why he provides that assurance, presumably, is because he has no choice. It is worth reminding the Committee that when these Houses of Parliament set up the ombudsman in the first place, it was on the basis that he or she would not have the powers of a High Court judge. There was in those innocent days of the 1960s a kind of trust that Governments would comply with the recommendations. Perhaps we need to revisit the issue more generally.
The issue before us will not go away, however, nor will the victims. I shall not press the new clause to a vote, because it will simply be voted down. However, I shall return to it on Report. The hon. Member for Yeovil reminded us that there is a substantial number of signatories to the various early-day motions on the subject, including a large number of Labour Members. I suspect that on a vote, we may fare better on Report than in Committee, not only because of the pensions issue, but because of the much broader constitutional issue. Despite the Minister’s assurance that it will not become a habit, the Government’s attitude to the ombudsman is a worrying trend, which the Public Administration Committee clearly identified in its report.
I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.
Further consideration adjourned.—[Mr. Heppell.]

Adjourned accordingly at twenty-two minutes past Seven o’clock till Thursday 8 February at ten minutes past Nine o’clock.